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SOUTHERN  BRA^3l'GH 

''JVERSITY  OF  CALIFORK'W 
LIBRARY, 

*^S  AHGKLES.  CALIf^. 


61ST  CONGRESS  :  :  2d  SESSION 

1909-1910 


SENATE  DOCUMENTS 


Vol,  38 


WASHINGTON  :  :  GOVERNMENT  PRINTING  OFFICE  :  :  1910 


61ST  Congress  }  SENATE  {  ^e^l^"',?^^ 

2d  Session       )  I,     JNo.  iib/ 


NATIONAL  MONETARY  COMMISSION 


The  Independent  Treasury  of  the 

United  States  and  Its  Relations 

to  the  Banks  of  the  Country 


DAVID    KINLEY,   Ph.   D.,  LL.  D. 

University  of  Illinois 


Washington  :  Government  Printing  Office  :  1910 


^    J..  O  ^  'Xi 


NATIONAL  MONETARY  COMMISSION. 


Nbuson  W.  Aldrich,  Rhode  Island,  Chairman. 
Edward  B.  Vrbsland,  New  York,  Vice -Chairman. 


Julius  C.  Burrows,  Michigan. 
Eugene  Hale,  Maine. 
Philander  C.  Knox,  Pennsylvania. 
Theodore  E.  Burton,  Ohio. 
Henrv  M.  Teller,  Colorado. 
Hernando  D.  Money,  Mississippi. 
Joseph  W.  Bailey,  Texas. 


John  W.  Weeks,  Massachusetts. 
Robert  W.  Bonynge,  Colorado. 
Sylvester  C.  Smith,  California. 
Lemuel  P.  Padgett,  Tennessee. 
George  E.  Burgess,  Texas. 
Arsene  p.  Pujo,  Louisiana. 
Arthur  B.  Shblton,  Secretary. 


A.  Piatt  Andrew,  Special  Assistant  to  Commission. 


)CG'Z 


NOTE. 

This  monograph  is  a  revision  and  continuation  of  the 
work  of  the  present  writer,  pubHshed  by  CroweU  &  Co., 
New  York,  in  1893,  under  the  title  "The  Independent 
Treasury  of  the  United  States."  The  main  purpose  of 
the  essay,  when  first  written,  was  not  so  much  to  trace 
the  history  of  the  United  States  Treasury  in  great  detail 
as  to  state  its  influence  as  a  receiver  and  disburser  of 
money  upon  the  money  market  and  business  interests  of 
the  country.  That  purpose  has  been  held  in  view  in  the 
revision,  although  a  few  details  have  been  added  to  the 
historical  part. 

For  kindly  help  in  furnishing  materials  necessary  for 

bringing  the  discussion  down  to  date  I  am  indebted  to  the 

First  Assistant  Secretary  of  the  Treasury,  the  Treasurer 

of  the  United  States,  and  the  assistant  treasurers  in  New 

York  and  Chicago. 

David  KinIvEy. 


CONTENTS. 


Page. 

Chapter  I.  The  banks  and  the  Treasury  to  1833 7 

Procedure  previous  to   the  estabhshment  of  the 

Second  United  States  Bank 7 

The  Second  United  States  Bank 16 

II.  The  state  banks  as  depositaries 26 

The  removal  of  the  public  deposits  and  the  specie 

circular 26 

Proposal    of    the   independent    treasury    by    Van 

Buren 33 

Repeal  of  the  subtreasury  law 41 

Final  establishment  of  independent  treasury 46 

III.  Development  of  the  independent  treasury 53 

The  provisions  of  the  law 53 

The  independent  treasury  during  the  Mexican  war .  60 

Defects  shown  in  early  years  of  operation 64 

Early  influence  on  the  money  market  and  renewal 

of  connection  with  banks 69 

IV.  The  organization  and  work  of  the  independent  treasury .  84 

Provisions  for  keeping  the  public  money 84 

Banking  functions  of  the  independent  treasury  ...  96 

V.  The  reaction  toward  closer  relations  with  the  banks  ...  1 1 1 

The  period  of  fiat  paper  money in 

A  decade  of  vacillating  policy  after  resumption  ...  117 

The  abandonment  of  the  policy  of  independence  .  .  125 

Security  for  deposits  of  public  money 132 

Operations  of  the  independent  treasury  under  the 

policy  of  reaction 137 

VI.  The  influence  of  the  ordinary  operation  of  the  inde- 
pendent treasury  system  on  business 147 

The  difi'erent  periods  of  subtreasury  action 147 

The   reaction   of   the  subtreasury   system   on   the 

banks 152 

General   conclusions   concerning   the   influence   of 

the  independent  treasury  system 187 

Factors  which  have  modified  the  influence  of  the 

independent  treasury 197 

VII.  Treasury  relief  in  crises,  through  1857 208 

Methods  of  relief 208 

Operation  in  1853  and  1857 218 


National     M  o  n  et  ar  y     Commission 


Chapter  \'III.  Treasury  relief  in  crises,  1873-1890 225 

The  panic  of  1873 225 

The  crisis  of  1884 236 

The  stringency  of  1890 236 

IX.  Treasury  relief  in  the  crisis  of  1893,  and  the  break- 
down of  treasury  independence 245 

The  panic  of  1893 245 

Bond  sales,  1894-1898 250 

X.  Treasury  relief  in  the  panic  of  1907 255 

'          XI.  Conclusions  as  to  treasury  relief  in  crises 268 

General  conclusions 268 

Relief  by  bond  purchases .• 272 

Relief  by  deposits  in  banks 278 

Limitations  of  subtreasury  relief  in  crises 281 

XII.  The  independent  treasury  as  a  fiscal  agent 291 

In  the  Mexican  war 291 

In  the  civil  war 294 

In  refunding  operations 304 

The  loans  of  1 893- 1896 311 

The  Spanish  war  loan 313 

Conclusions 315 

XIII.  Proposals  for  replacement  of  the  subtreasury  sys- 

tem    317 

Conditions  to  be  met 317 

Classification  of  proposals 322 

XIV.  Summary 323 


APPENDICES. 

1 .  References 331 

2.  Subtreasury  law  with  amendments 334 

3.  Treasury  Department  circular  on  the  issue  and  redemption  of  cur- 

rency          357 

4.  Treasury    Department    circular  on  public   moneys    and   official 

checks  of  disbursing  officers 359 

5.  Treasury  Department  circular  on  assembling  of  disbursing  officers' 

checks,  etc 364 


THE  INDEPENDENT  TREASURY  OF 
THE  UNITED  STATES  AND  ITS  RE- 
LATIONS TO  THE  BANKS  OF  THE 
COUNTRY. 


Chapter  I. — The  Banks  and  the  Treasury  to  1833. 

PROCEDURE    PREVIOUS    TO   THE    ESTABUSHMENT    OF   THE 
SECOND  UNITED   STATES   BANK. 

The  policy  of  the  Federal  Government  with  reference 
to  keeping  public  money  and  dealing  with  banks  has  not 
been  consistent.  It  shows  alternate  attempts  at  the  use 
of  banks  and  independent  management.  Roughly  speak- 
ing, our  practice  in  this  matter,  since  the  adoption  of  the 
Constitution,  may  be  divided  into  six  periods.  During 
the  first  two  years — that  is,  until  the  establishment  of 
the  First  United  States  Bank — the  officers  of  the  Govern- 
ment followed  the  practice  pursued  under  the  confedera- 
tion, of  utilizing  the  banks  and  also  leaving  public  money 
in  the  hands  of  collectors  until  it  was  needed.  From  1791 
to  18 II  the  First  United  States  Bank  and  its  branches 
were  the  principal  depositaries."  The  third  period,  from 
1811  to  1817,  was  the  first  era  of  the  use  of  state  banks  as 
the  term  is  commonly  understood.  From  181 7  to  1833 
the  Second  United  States  Bank  was  the  principal  agency 
of  the  Treasury.     From  1833  to  1846  was  the  second  era 

o  This  word  is  spelled  both  depositories  and  depositaries.  The  latter  is 
preferable,  and  is  used  in  this  monograph,  except  in  quotations.  Of  late 
years  the  reports  of  the  Treasury  Department  use  it  almost  uniformly. 


National     Monetary     Commission 

of  the  state  banks  as  government  depositaries  and  agents. 
There  was,  indeed,  a  year  within  this  period,  from  June, 
1840,  to  August,  1841,  the  period  of  the  first  estabhsh- 
ment  of  the  independent  treasury,  during  which  the  Gov- 
ernment was  supposed  to  keep  its  own  money.  From 
1846  to  the  present  time  the  so-called  independent  treas- 
ury, or  the  subtreasury  system,  has  been  in  operation. 

Under  the  terms  of  the  law  establishing  the  independent 
treasury  the  Government  was  expected  to  keep  its  own 
money  and  to  have  no  connection  with  the  banking  insti- 
tutions of  the  country.  But  the  sixty  years  during  w^hich 
the  law  has  been  in  operation  show  the  same  attitude  of 
inconsistency  as  to  the  use  of  banks  found  in  the  preced- 
ing sixty  years.  That  is  to  say,  there  are  times  within 
this  period  when  the  treasury  officers,  interpreting  the 
law  strictly,  have  kept  away  from  the  supposed  evil  influ- 
ence of  the  banks;  while  there  are  other  times  in  which 
the  opposite  spirit  has  been  shown,  and  the  use  of  banks 
has  been  resorted  to  so  far  as  the  law  would  allow,  if  not, 
indeed,  beyond  what,  in  the  opinion  of  many,  was  legally 
proper . 

For  example,  from  the  time  of  its  establishment  down 
to  the  civil  war  the  law^  w^as  pretty  strictly  interpreted. 
The  fiscal  necessities  of  the  Government  in  the  civil  war 
forced  a  closer  connection  between  the  banks  and  the 
Treasury,  and  the  law  establishing  our  present  national 
banking  system  recognized  the  necessity  of  this  by  making 
these  banks  government  depositaries  of  internal  revenue. 
Since  the  civil  war  the  pressure  of  business  interests  and 
the  differing  policies  of  successive  Secretaries  of  the  Treas- 
ury have  given  us  varying  periods  of  large  and  small  use 


Independent   Treasury  of  the    United  States 

of  the  banks  by  the  Treasury,  until  of  late  our  policy  has 
seemed  to  be  to  have  a  Treasury  as  little  independent  of 
the  banks  as  possible  under  the  law. 

The  first  attempts  at  independent  holding  and  manage- 
ment of  the  public  money  were  due  to  circumstances  not 
connected  with  either  public  or  official  hostility  to  banks. 
This  feeling  came  later.  During  the  confederation,  and 
for  a  short  time  afterwards,  circumstances  did  not  make 
a  large  use  of  banks  by  the  Government  necessary.  The 
attention  of  the  people  had  been  occupied  with  other  mat- 
ters. The  West  was  very  young,  commercial  develop- 
ment was  not  great,  and  it  is  was  customary  for  other  gov- 
ernments to  handle  their  fiscal  affairs  through  the  banks. 
Our  officers,  therefore,  had  followed  the  traditional  meth- 
ods, and  no  public  opinion  had  been  formulated  to  influ- 
ence them  on  the  matter. 

But  the  feeling  against  banks,  the  popular  distrust  of  the 
"money  power,"  showed  itself  early  in  our  history,  and 
has  continued  with  varying  intensity  until  the  present 
time.  There  is  in  this  country  a  widespread  feeling  of 
dislike  of  banks  of  issue.  Many  people  think  that  the 
privilege  of  issue  is  a  government  function  and  yields  such 
large  returns  that  private  individuals  and  corporations 
should  not  be  permitted  to  enjoy  it.  Our  agricultural 
classes,  especially,  seem  to  think  that  our  national  banks 
deprive  the  people  at  large  of  something  that  rightly 
belongs  to  them.  At  various  times  farmers'  alliances  and 
other  agricultural  associations  have  adopted  resolutions 
in  favor  of  the  abolition  of  national  banks,  or  of  depriving 
them  of  the  privilege  of  note  issue.  This  feeling  of  preju- 
dice is  part  and  parcel  of  the  general  antipathy  to  iiicnop- 


National     Monetary     Commission 

oly  and  the  fear  that  the  interests  of  the  people  will  be 
subjected  to  the  control  of  wealth. 

Previous  to  the  adoption  of  the  Constitution  no  place 
was  provided  by  law  for  the  keeping  of  public  money.  It 
was  left  in  charge  of  a  committee  of  Congress,  and  they 
used  the  Bank  of  North  America  at  Philadelphia  as  a 
depositary  and  fiscal  agent,  sometimes  left  the  money  with 
the  collectors  and  sometimes  made  use  of  the  loan  offices. 
The  Treasury  was  established  by  act  of  Congress  Septem- 
ber 2,  1789.  This  act  gave  it  a  legal  but  not  a  physical 
existence.  The  law  made  it  the  duty  of  the  Treasurer  to 
receive,  keep,  and  disburse  the  money  of  the  United 
States.  As  a  matter  of  fact,  the  collectors  of  customs, 
commissioners  of  revenue,  and  selected  banks  became  the 
custodians  of  the  government  money.  The  collectors  kept 
the  money  until  they  could  deposit  it  in  some  bank  desig- 
nated by  the  Treasurer,  or  until  it  was  drawn  on  or  called 
for  by  the  Treasury  Department.  At  this  time  the  banks 
used  as  depositaries  were  the  Bank  of  North  America, 
which  had  been  in  use  from  the  time  of  the  Confederation, 
and  the  banks  of  Massachusetts,  New  York,  and  Maryland. 
This  practice  was  continued  for  the  next  two  years,  until, 
under  the  influence  of  Alexander  Hamilton,  a  charter  was 
granted  to  the  First  United  States  Bank. 

It  was  in  the  third  session  of  the  First  Congress  that 
events  began  so  to  shape  themselves  as  to  point  to  a  national 
bank  as  a  part  of  our  governmental  machinery.  In  this 
session  provision  was  made  for  the  payment  of  the  debts 
of  the  States  which  had  been  assumed  by  the  General 
Government.  The  hostility  of  the  antifederalists  toward 
the  adoption  of  the  Constitution  was  turned  largely  against 


Independent   Treasury  of  the   United  States 

the  assumption  of  these  debts  and,  later,  against  the 
measures  of  the  Government  to  provide  for  their  payment. 
In  his  report  on  a  national  bank,  Hamilton  emphasized 
the  utility  of  such  an  institution.  He  expressed  the  opin- 
ion that  "a  national  bank  is  an  institution  of  primary 
importance  to  prosperous  administration  of  the  finances, 
and  would  be  of  the  greatest  utility  in  the  operations  con- 
nected with  the  support  of  the  public  credit."  Provisions 
for  the  establishment  of  the  bank  were  finally  approved 
substantially  as  proposed  by  Hamilton,  and  a  charter  was 
granted  in  1791  to  run  for  twenty  years.  Although  the 
law  did  not  so  specify,  Hamilton  apparently  thought  its 
intent  was  that  the  bank  should  be  used  as  a  depositary 
of  public  money  and  as  a  fiscal  agent  of  the  Government.  '^ 
Indeed,  there  was  no  legislation  giving  directions  to  the 
Treasurer  concerning  the  keeping  of  public  money  before 
the  time  of  the  charter  of  the  Second  Bank  of  the  United 
States.  Undoubtedly  it  was  one  of  his  purposes,  in  seek- 
ing the  establishment  of  the  bank,  to  promote  his  own 
plans  for  strengthening  the  credit  of  the  Federal  Govern- 
ment. Moreover,  as  we  know,  Hamilton's  ideas  were 
colored  largely  by  European  experience  and  a  central 
bank  was  in  his  mind  a  normal  part  of  the  fiscal  machinery. 
Accordingly,  Hamilton  used  the  United  States  Bank 
and  its  branches  from  the  start.  The  branches  were  at 
Boston,  New  York,  Washington,  Newport,  Charleston, 
Savannah,  and  New  Orleans.  He  was  not  able  to  break 
away  from  the  use  of  the  state  banks  at  once,  and  con- 

«  See  his  letter  to  an  officer  of  the  Bank  of  New  York.     Hamilton's 
Works  [Ed.  by  Hamilton,  J.  C],  V:  486. 


National    Monetary     Commission 

tinned  to  use  them  until  1794,  gradually  reducing  the 
number.     In  1794  only  one  state  bank  was  in  use." 

The  United  States  Bank  and  its  branches  were  utilized 
until  the  expiration  of  its  charter  in  1 8 1 1 .  Hamilton  was 
successful  in  eliminating  the  state  banks  as  the  principal 
custodians  of  the  public  money,  and  the  people  of  the 
country  seem  to  have  acquiesced.  This  may  mean  that 
the  people  shared  his  views  as  to  the  desirability  of  utilizing 
the  United  States  Bank;  more  likely,  however,  it  means 
simply  that  there  was  no  public  interest  in  the  matter. 
At  any  rate,  there  was  no  public  agitation  of  the  subject. 
"This  method  of  keeping  the  public  money  evidently 
worked  satisfactorily,  since  for  a  number  of  years  no 
Member  of  Congress  seems  to  have  thought  it  necessary 
to  inquire  by  resolution  in  regard  to  the  safe-keeping  of 
the  public  funds.  In  1801  a  committee  of  the  House, 
appointed  to  examine  the  state  of  the  Treasury,  dismissed 
the  whole  subject  of  keeping  the  money  in  a  single  sen- 
tence, by  saying:  'All  moneys  received  by  the  Treasurer 
are  deposited  by  him  in  the  Bank  of  the  United  States  and 
other  banks.'  It  is  evident  from  this  that  the  system 
gave  general  satisfaction."* 

Gradually,  however,  the  use  of  the  state  banks  again 
increased,  very  likely  because  the  branches  of  the  Bank 
of  the  United  States  were  not  sufficiently  numerous  or  not 
located  in  all  places  where  government  collections  and 
disbursements  were  necessary.  Possibly  the  cause  may 
have  been  the  political  character  of  the  state  banks;  for 

a  American  State  Papers,  Finance,  I:  283. 

6  Phillips,  J.  B.:  Methods  of  Keeping  the  Public  Money  of  the  United 
States,  Publ.  Mich.  Pol.  Sci.  Assoc,  IV:  3:  6. 


Independent   Treasury  of  the   United   States 

we  know  that  attempts  were  made  to  establish  banks, 
not  for  legitimate  banking,  but  for  political  influence. 
Even  as  late  as  1859,  the  bank  commissioners  of  Maine, 
in  their  annual  report,  say  that  the  history  of  banking 
legislation  in  that  State  shows  that  charters  were  not 
always,  if  generally,  granted  on  evidence  of  public  need 
or  the  legitimate  business  wants  of  the  place  in  which 
they  were  to  be  located. «  Whatever  the  cause,  the  use 
of  state  banks  gradually  extended.  In  1806  Gallatin 
reported  that,  besides  the  Bank  of  the  United  States  and 
its  branches,  five  state  banks  were  used  as  depositaries.* 
In  18 1 1  twenty-two  such  banks  were  used  and,  in  1816, 
ninety-four.*^  In  1809  Congress  passed  a  law  requiring 
disbursing  officers  of  the  Government  to  keep  the  public 
money  in  their  charge  in  banks  selected  by  the  President. 

There  was  no  loss  of  public  money  tlirough  the  use  of 
state  banks  as  depositaries  during  this  period,  but  some 
embarrassment  was  caused  by  the  use  of  state-bank  notes. 
As  is  well  known,  these  were  not  accepted  at  par  in  places 
remote  from  the  bank  of  issue;  and,  indeed,  were  not 
accepted  without  discount  among  the  banks  themselves. 
The  experience  of  the  public  at  large  in  this  respect  seems 
not  to  have  shown  them  the  difficulties  of  an  alliance  with 
the  banks,  even  though  the  latter  discharged  their  services 
as  mere  depositaries  without  defalcation. 

While  things  were  running  smoothly,  during  the  period 
of  active  operation  of  the  United  States  Bank,  people 

o  See  Report  of  the  Bank  Commissioners  of  the  State  of  Maine,  1859. 
Also  Sumner,  W.  G..  Andrew  Jackson,  228;  and  Gallatin's  Writings 
[Ed.  by  Henry  Adams],  I;  129. 

t  American  State  Papers  Finance,  II.  216. 

<■  Ibid.,  11:517  and  131. 

13 


National    Monetary     Commission 

forgot,  as  they  usually  do,  the  real  causes  of  the  smooth 
working  of  the  fiscal  machinery.  The  notion  that  the 
Government  can  do  things  as  well  as  private  corporations, 
especially  in  banking  matters,  and  the  belief  that  many 
things  should  be  done  through  direct  Government  agency, 
gradually  created  a  prejudice  against  the  use  of  the  bank 
and  its  branches  by  the  Government. 

The  question  of  rechartering  the  bank  came  up  in  Con- 
gress in  1810,  and  was  supported  by  Secretary  Gallatin. 
His  reasons  for  supporting  the  proposal  were  that  the 
bank  had  kept  the  public  money  safely,  transferred  it  to 
the  various  centers  of  disbursement,  and  had  been  a  suc- 
cessful fiscal  agent  of  the  Government  in  placing  loans 
and  in  collecting  the  revenues.  On  account  of  the  late- 
ness of  the  session,  no  action  was  taken  and  application 
for  a  renewal  of  the  charter  was  made  again  in  the  follow- 
ing year.  But  the  state  banks  had  become  relatively 
numerous  and  powerful.  The  policy  of  giving  bank  char- 
ters to  representatives  of  the  dominant  party  in  order  to 
tie  them  to  the  administration,  so  eloquently  urged  by 
Jefferson,  was  too  successful.  They  became  masters  of 
the  situation,  so  that  imder  pressure  from  them  a  renewal 
of  the  charter  was  refused,  in  spite  of  the  fact  that  the 
bank  "so  far  as  we  can  judge  from  the  information  we 
have  in  regard  to  it,  was  soberly  managed,  successful,  and 
beneficial  in  restraining  the  issues  of  smaller  banks. "  '^  Un- 
doubtedly it  was  this  restraining  influence  that  produced 
hostility  sufficient  to  prevent  the  passage  of  the  law. 

The  First  United  States  Bank,  therefore,  rapidly  woimd 
up  its  afifairs  and  the  Government  was  confronted  with 


a  Sumner,  \V.  G.:  History  of  American  Currency,  63. 
14 


Independent    Treasury   of  the    United   States 

the  necessity  of  finding  other  agents  to  do  its  fiscal  busi- 
ness. For,  as  we  have  remarked,  the  United  States  Treas- 
ury, by  the  law  creating  it,  had  a  legal,  but  no  physical 
existence.  Consequently  it  became  necessary  again  to 
use  state,  or  local,  banks.  This  necessity  came  upon  the 
Government  at  a  time  when  smoothness  in  financial  ad- 
ministration was  to  be  of  greater  importance  than  at  any 
previous  time  since  the  adoption  of  the  Constitution. 
For  the  country  was  on  the  verge  of  war.  The  experi- 
ence of  the  next  four  years  taught  the  opponents  of  the 
United  States  Bank  that,  whatever  demerits  character- 
ized the  old  system,  the  state  banks  with  their  political 
pull  and  selfish  interests  were  by  no  means  able  to  render 
the  public  service  required. 

From  1811  to  1817,  then,  the  Government  perforce  used 
state  banks  as  its  depositaries  and  fiscal  agents.  There 
was  a  boom  in  the  establishment  of  state  banks  imme- 
diately after  the  United  States  Bank  wound  up  its  affairs. 
No  security  was  required  by  the  Government  for  its 
deposits,  but  the  banks  submitted  weekly  and  monthly 
statements  of  accounts  to  the  Secretary  of  the  Treasury. 
Under  the  agreement  entered  into  between  the  banks  and 
the  Treasurer,  the  banks  were  required  to  receive  to  the 
credit  of  the  Government  such  payments  as  individuals 
offered  them  for  the  Treasur}^  Drafts  on  the  banks 
which  did  not  have  sufficient  funds  to  make  the  necessary 
payments  were  met  by  a  supply  of  bills  on  the  principal 
cities.  Banks  were  required  to  pay  treasury,  war,  and 
navy  warrants,  or  drafts  by  the  United  States  Treasurer, 
and  to  make  their  payments  in  specie  if  so  demanded  by 


15 


National     Monetary     Commission 

the  holder .<^  The  difficulties  of  administration,  however, 
especially  in  transferring  money,  were  very  great.  It 
sometimes  took  months  for  banks  to  get  the  money 
required  by  a  draft  from  one  city  to  another.  Conse- 
quently it  was  necessary  for  the  Government  to  give 
notice  of  its  drafts  for  considerable  periods  in  advance  of 
making  them. 

As  already  remarked,  a  "bank  boom"  followed  the 
dissolution  of  the  United  States  Bank,  which  led  to  a 
large  increase  in  the  number  of  state  banks.^  From  1811 
to  1 8 14,  120  banks  were  established.  These  banks  were 
established  in  places  where  they  were  not  needed  and  every 
effort  was  made  to  circulate  their  notes  at  a  sufficient 
distance  from  home  to  prevent  their  early  return.  The 
usual  results  followed.  Specie  disappeared  from  circula- 
tion, and  suspensions  became  numerous,  especially  in  the 
West  and  South.  In  the  fall  of  18 14  all  the  banks  south 
of  New  England  suspended  payments.  Nearly  100  of 
these  had  been  fiduciaries  of  the  Government  and  carried 
down  with  them  about  $9,000,000  of  government  funds. 
In  order  to  meet  its  expenses,  the  Treasury  contracted 
loans  which  were  placed  at  between  80  and  90  and  paid 
for  in  bank  notes  depreciated  from  10  to  20  per  cent.  The 
confidence  of  the  people  in  this  method  of  keeping  of  its 
money  received  a  rude  shock. 

THE   SECOND   UNITED   STATES   BANK. 

The  lesson  of  the  four  years  of  the  war  period  was  heeded 
and  when  application  was  made  for  a  charter  for  a  second 

o  American  State  Papers,  Finance,  II:  520. 

''Crawford  in  American  State  Papers,  Finance,  III:  494. 

16 


Independent   Treasury  of  the    United   States 

United  States  bank,  the  request  met  with  but  little  oppo- 
sition. Even  Henry  Clay,  who  in  1811  had  opposed  the 
bank,  now  supported  the  measure  as  necessary  under 
existing  conditions.  Accordingly,  on  April  10,  1816,  the 
bank  act  was  passed. 

The  capital  was  $35,000,000,  one-fifth  of  which  was  to 
be  subscribed  by  the  Government  in  coin  or  "stock;" 
one-fifth  was  to  be  in  specie,  and  the  other  three-fifths  in 
specie  or  government  stock.  The  bank  was  to  pay  the 
Government  a  bonus  of  $1,500,000;  it  was  to  be  the 
depositary  of  public  moneys,  and  was  required  to  disburse 
them,  free  of  charge,  in  any  part  of  the  country.  Five 
of  the  25  directors  were  to  be  appointed  by  the  President. 
The  charter  was,  as  before,  for  twenty  years. 

The  bank  was  to  begin  business  January  1,1817.  The 
conditions  under  which  it  started,  however,  were  unfavora- 
ble. Specie  payments  were  suspended,  the  country  had  just 
gone  through  a  great  commercial  crisis,  the  state  banks 
were  hostile  because  they  were  to  be  deprived  of  the  use 
of  United  States  deposits,  and  the  field  of  operation  of 
the  bank  was  as  yet  untried. 

At  the  time  of  the  opening  of  the  Second  United  States 
Bank  89  state  banks  were  used  as  depositaries,  and  the 
Treasurer  had  many  bank  notes  on  special  deposit  which 
were  uncurrent  and  irredeemable. 

The  Secretary  of  the  Treasury  did  not  transfer  the  pub- 
lic deposits  immediately  from  the  state  banks  to  the  new 
bank  of  the  United  States.  Indeed,  Secretary  Crawford 
had  definitely  promised  not  to  withdraw  any  part  of  the 
public  money  before  July  i,  18 17,  provided  the  banks 
would  resume  specie  payments  by  the  last  week  of  the 
41969° — 10 2  17 


National    Monetary     Commission 

preceding  February.  Although  the  proposition  was  not 
accepted  by  the  banks,  the  Secretary  was  not  able  to 
withdraw  the  deposits.  Later,  the  banks  agreed  to  resume 
payments  toward  the  end  of  February  on  condition  that 
the  government  deposits  would  not  be  transferred  before 
July,  and  on  condition  also  that  the  United  States  Bank 
would  not  draw  on  its  balances  in  the  state  banks  until  it 
had  discounts  aggregating  something  like  six  millions 
in  the  principal  cities  of  the  country .'^  The  favorable 
condition  of  foreign  trade  in  the  winter  of  1816-17  helped 
the  banks  in  their  efforts  to  bring  about  resumption. 

Instead  of  establishing  independent  offices  of  discount 
and  deposit  in  different  parts  of  the  country,  although 
under  the  charter  they  were  authorized  to  do  so  if  they 
saw  fit,  the  officers  of  the  bank,  in  conjunction  with  the 
Secretary  of  the  Treasury,  arranged  a  plan  to  conduct  the 
treasury  business  through  the  bank,  its  branches,  and 
state  banks  selected  by  the  United  States  Bank  for  the 
purpose  and  approved  by  the  Secretary.  After  the 
arrangements  were  perfected,  the  direct  relationship  of 
the  Treasury  with  the  state  banks  holding  public  deposits 
ceased,  and  the  relationship  continued  only  through  the 
United  States  Bank. 

Under  the  new  arrangements,  receipts  for  public  money 
must  show  the  source  of  the  money,  and  weekly  state- 
ments of  each  depositary  bank  must  be  made  which 
would  correspond  strictly  with  these  receipts.  All  re- 
ceipts must  give  the  amounts,  which  must  be  entered 
by  the  banks  to  the  credit  of  the  United  States  Bank  for 
the  use  of  the  Treasurer,  and  all  treasury  drafts  were  to  be 

o  American  State  Papers,  Finance,  III:   231. 

18 


Independent   Treasury  of  the    United   States 

drawn  on  the  United  States  Bank.  The  treasury  drafts, 
however,  had  to  show  the  office  of  discount  or  deposit, 
or  the  state  bank  at  which  they  were  to  be  paid.  Monthly 
reports  were  required  from  all  depositaries. 

It  was  obvious  from  this  arrangement  that,  although 
the  law  establishing  the  United  States  Bank  aimed  to 
separate  the  Treasury  from  the  state  banks,  it  did  not 
succeed.  Treasury  operations  made  depositaries  necessary 
in  all  parts  of  the  country,  and  as  it  was  impossible  to 
establish  independent  offices,  state  banks  had  to  be  used. 
During  the  first  two  years  of  its  existence,  the  manage- 
ment of  the  bank  was  far  from  satisfactory.  It  aggravated 
the  troubles  of  the  financial  situation  instead  of  reliev- 
ing them.  Specie  payments  were  nominally  resumed  in 
1817,  but  the  insidious  canker  of  inflation  had  eaten  its 
way  into  the  arteries  of  business,  and  in  the  crisis  of  18 19 
came  another  suspension,  that  lasted  for  two  years.  "In 
the  first  two  years  of  its  existence  the  great  bank  was 
carried  to  the  verge  of  bankruptcy  by  as  bad  banking  as 
was  ever  known.  Instead  of  checking  the  other  banks 
in  their  improper  proceedings,  it  led  and  surpassed  them 
all.  A  clique  inside  the  bank  was  jobbing  in  its  shares, 
and  robbing  it  to  provide  the  margins.  Instead  of  recti- 
fying the  currency,  it  made  the  currency  worse.  In- 
stead of  helping  the  currency  out  of  the  distress  produced 
by  the  war,  it  plunged  the  country  into  the  commercial 
crisis  of  1819,  which  caused  a  general  liquidation,  lasting 
four  or  five  years.  *  *  *  It  is  almost  incredible  that 
the  legislation  of  any  civilized  country  could  have  opened 
the  chance  for  such  abuses  of  credit,  banking,  and  cur- 


19 


National     Monetary     C  ommis  s  io 


n 


rency  as  then  existed." «  On  April  i,  1819,  just  fifteen 
months  after  the  bank  began  its  career  for  the  purpose  of 
restoring  financial  health  to  the  country,  the  history  of 
its  operations  was  told  in  the  following  statement  of  its 
condition : 

Specie $26,  745.  28 

Notes 6,  000,  000.  00 

Due  other  banks 79,  1 25 .  99 

Due  Government '. 500,  000.  00 

Due  Barings goo,  000.  00 

The  New  York  and  Boston  branches  were  in  worse 
condition.  The  Baltimore  branch  had  given  $3,000,000 
discounts,  of  which  the  parent  bank  had  no  knowledge, 
apparently  from  corrupt  motives,  and  $1,671,221  were 
lost  there.  The  total  losses  to  date  were  $3,500,000. 
Dividends  for  $4,410,000  had  been  paid,  of  which 
$1,348,553  had  been  gained  by  interest  on  public  se- 
curities. Net  loss  over  $500,000.  "  The  bank  now  took 
the  most  energetic  measures  to  save  itself,  and  in  seventy 
days  was  once  more  solvent,  but  it  had  ruined  the  com- 
munity. The  'golden  age'  was  now  far  in  the  past,  and  was 
seen  to  be  only  a  gilt  paper  age  after  all.  The  ruin  was 
almost  universal."* 

After  the  recovery  a  period  of  several  years  of  pros- 
perity followed,  and  the  management  of  the  bank  was 
thoroughly  reorganized  and  sound.  From  this  time  on 
until  the  great  "bank  war"  its  affairs  seem  to  have  been 
conducted  with  a  view  to  performing  its  duty  to  the 
Government  as  well  as  to  its  individual  stockholders, 
and  it  rendered  such  aid  to  the  public,  directly  and  in- 

o  Sumner,  W.  G.;  Andrew  Jackson,  American  Statesmen  Series,  233. 
&  Sumner,  W.  G.;  History  of  American  Currency,  78. 


20 


Independent   Treasury  of  the   United   States 

directly,  as  entitled  it  to  respect  and  fair  treatment  on 
the  part  of  the  servants  of  the  people. 

The  events  of  what  is  known  as  the  "bank  war"  are 
familiar  to  all  students  of  American  history,  so  that  a 
detailed  account  of  it  is  not  necessary."  But  it  will  be 
well  for  our  present  purpose,  to  recall  its  main  features, 
because  it  was  really  the  first  step  in  the  immediate 
sequence  of  events  that  led  to  the  establishment  of  the 
independent  treasury. 

As  already  said,  the  ten  years  following  the  revulsion 
of  1819-1825  were  years  of  almost  unbroken  prosperity. 
The  bank  management  was  sound,  government  credit 
was  excellent,  the  public  debt  was  rapidly  reduced,  and 
the  industrial  and  commercial  situation  was  healthy. 
Matters  between  the  Treasury  and  the  banks  seem  to 
have  gone  very  smoothly.  State  banks  in  larger  or  smaller 
number  were  used  throughout  the  period,  as  many  as  15 
being  employed  between  1830  and  1833.  There  had 
been  some  loss,*  indeed,  during  the  period  of  action  of 
the  United  States  Bank,  but  not  through  the  transac- 
tions of  that  institution.  The  question  of  the  continu- 
ance of  the  bank  was  not  under  discussion.  In  fact, 
scarcely  any  mention  of  the  subject  was  made  until  Presi- 
dent Jackson  referred  to  it  in  his  message  of  December, 
1829.     In  this  message  he  reopened  the  question  of  the 

o  For  a  general  survey  of  the  whole  matter  see  von  Hoist,  H.:  Consti- 
tutional History  of  the  United  States,  II;  Schurz,  Carl:  Henry  Clay 
(American  Statesmen  Series);  Sumner,  W.  G. :  Andrew  Jackson  {Ibid); 
Benton,  Thos.  H.:  Thirty  Years'  View;  Bolles,  A.  S.:  Financial  History 
of  the  United  States;  Young,  A.  W.:  American  Statesman;  Story,  J.. 
Commentaries  on  the  Constitution,  III:  xxv;  Lalor,  J.  J.:  Cyclopedia  of 
Political  Science,  bibliography  and  article  on  Bank  Controversy. 

&  Executive  Documents,  No.  lo,  26th  Cong.,  ist  sess. 


National    Monetary     Commission 

constitutionality  of  the  bank,  but  the  committee  to  which 
this  portion  of  the  message  was  referred  in  the  House  of 
Representatives  made  a  report  favorable  to  the  institu- 
tion. 

Foiled  in  this  line  of  attack,  General  Jackson  turned 
his  attention  to  securing  evidences  of  mismanagement 
and  illegal  procedure,  and  it  was  on  the  basis  of  alleged 
unsoundness  that  he  justified  the  removal  of  the  deposits 
from  the  bank  in  1833.  Although  his  effort  to  prove 
mismanagement  was  a  failure,  yet  certain  occurrences 
lent  color  to  his  charges.  The  principal  of  these  were  the 
disagreement  that  arose  between  Secretary  Ingham  of 
the  Treasury  and  Mr.  Biddle,  president  of  the  bank,  con- 
cerning the  management  of  the  branch  bank  at  Ports- 
mouth, N.  H.;  the  delay  of  three  months  in  paying 
$5,000,000  of  3  per  cent  government  stock  which  fell  due 
in  July,  1832;  the  refusal  to  pay  drafts  on  the  branch 
banks  except  at  the  branches  themselves ;  and  the  alleged 
interference  of  the  bank  in  the  presidential  campaign  of 
1832. 

Moreover,  there  were  many  points  of  bad  management, 
but  they  were  mistakes  to  be  corrected,  not  to  be  made 
reasons  for  destruction.  The  usurpation  of  the  important 
business  of  the  bank  by  the  exchange  committee  was 
wrong;  the  discretion  allowed  President  Biddle  in  the 
struggle  was  too  great;  the  policy  of  temporarily  loaning 
the  cash  in  the  drawer  on  collateral  securities,  without 
interest,  was  exceedingly  bad  business  poHcy.  These  and 
similar  administrative  mistakes  were  the  first  steps  in  the 
career  of  the  bank  that  led  to  its  downfall  and  ruin.  It 
was  guilty  of  great  financial  erorrs,  but  they  were  not 


Independent   Treasury  of  the   United  States 

beyond  remedy,  and  that  they  formed  a  reasonable 
ground  for  such  hostility  as  was  displayed  is  untrue. 
Speaking  merely  from  the  point  of  view  of  sound  bank 
management,  in  the  list  of  charges  made  since  Jackson 
first  attacked  the  bank  in  1829,  "we  can  find  nothing  but 
frivolous  complaints  and  ignorant  criticism,  successfully 
refuted  except  when  we  touch  the  branch  drafts."  '* 
And  it  may  fairly  be  questioned,  even  though  we  deny 
the  legitimacy  of  the  point,  whether  the  President's  hos- 
tility was  not  a  powerful,  force  in  driving  the  institution 
into  the  road  that  led  to  ruin.  It  is  not  proven  that  the 
funds  of  the  bank,  acknowledged  to  have  been  used  in 
legitimate  methods  of  self-defense,  were  ever  devoted  to 
the  uses  of  poHtical  partisanship.  It  is  hardly  correct 
to  say  that  the  bank  made  a  panic  in  1834,  for  the  tangible 
grounds  of  a  panic  were  absent;  and  the  crisis  that  came, 
real  and  distressing  as  indeed  it  was,  may  be  fairly  attrib- 
uted less  to  contraction  by  the  bank  than  to  the  fears 
engendered  as  to  the  possible  consequences  of  the  enmity 
of  the  Executive. 

In  the  struggle  with  the  President,  however,  the  bank 
forgot  that  it  was  more  than  a  private  institution;  that 
one  of  the  purposes  of  its  existence  was  the  service  of  the 
Government,  and  that  in  its  capacity  of  fiscal  agent  it 
owed  the  country  a  duty  and  a  service  with  which  its 
private  interests  should  not  have  been  allowed  to  inter- 
fere. Yet  even  here,  while  it  can  not  be  justified,  it 
might  claim  to  be  excused,  on  the  ground  that  the  Gov- 
ernment itself,  whose  interests  it  had  in  charge,  was  seek- 
ing to  cripple  its  power  to  conserve  these  interests. 

o  Sumner,  W.  G. :  Andrew  Jackson  (American  Statesmen  Series),  267. 

23 


National     Monetary     Commission 

Through  most  of  the  years  of  its  existence  the  bank 
gave  the  country  a  more  uniform  currency  than  existed 
at  its  creation;  it  facilitated  the  fiscal  operations  of  the 
Government;  it  collected  its  revenues;  it  equalized  ex- 
changes; and  it  gave  a  healthy  tone  to  the  business  of 
the  country.  But  neither  its  principles  nor  its  acts  were 
perfect.  It  was  not  a  panacea  for  industrial  distress,  nor 
a  preventive  of  its  occurrence.  It  may  justly  be  charged 
with  sins  of  commission  and  omission,  and  the  path  it 
finally  trod,  whatever  the  force  that  impelled  it  thereto, 
can  but  make  us  rejoice  that  its  custody  of  the  people's 
money  ceased  before  it  leaped  over  the  precipice  of  ruin 
on  which  it  for  a  long  time  stood,  and  over  which  it 
finally  plunged.  In  its  management  there  were  forces  at 
work  that,  if  it  had  been  let  alone,  would  probably  have 
finally  brought  its  ruin.  But  they  could  have  been  checked 
if  the  Government  had  been  friendly  instead  of  hostile, 
and  if  the  bank  had  kept  its  policy  up  to  the  high-water 
mark  of  business  integrity.  As  it  was,  the  course  of  the 
administration  aided  in  hastening  the  end. 

In  1835  the  "bank  war"  may  be  said  to  have  come  to 
a  close,  so  far  as  actual  conflict  was  concerned,  and  the 
President  had  won.  The  remaining  acts  of  the  bank  were 
only  the  making  of  arrangements  for  surrender.  When 
the  time  came,  however,  for  the  charter  to  expire  the 
bank  did  not  give  up  its  corporate  existence.  It  obtained 
a  charter  from  the  State  of  Pennsylvania  by  means  that 
would  not  bear  a  critical  examination  according  to  the 
standards  of  either  business  or  political  integrity. 
Instead  of  winding  up  its  affairs  and  paying  the  Govern- 
ment the  money  it  owed,  it  transferred  all  its  effects  to 

24 


Independent   Treasury  of  the    United   States 

the  new  corporation  and  continued  business  as  before. 
It  even  put  into  circulation  again  the  notes  which  it  had 
issued  as  Bank  of  the  United  States. 

It  may  be  easily  believed  that  an  institution  that  could 
do  such  things  had  sunk  far  below  the  plane  of  strict 
business  honor.  In  fact,  the  affairs  of  the  bank  were  at 
this  time  very  dishonestly  managed.  No  means  now 
seemed  too  corrupt  for  it  to  use  in  the  accomplishment  of 
its  purposes,  and  if  it  had  now  been  in  control  of  the 
government  resources  there  probably  would  be  a  sad 
story  to  tell  of  their  loss.  The  inevitable  end  came  in 
the  crash  of  1837.  The  bank  at  this  time  was  engaged 
in  operations  for  which  it  merits  the  severest  condem- 
nation, and  against  the  results  of  which  it  was  not  able 
to  sustain  itself.  It  closed  its  doors  in  October,  1839, 
opened  them  for  a  short  period  afterwards,  and  finally 
suspended  in  February,  1841.  It  managed  to  pay  its 
debts,  but  its  whole  capital  was  lost.  President  Biddle 
was  sued  for  over  $1,000,000  paid  out  during  his  adminis- 
tration, for  which  no  vouchers  could  be  found.  He  and 
several  directors  were  indicted  by  the  grand  jury,  but 
were  discharged. 

The  removal  of  the  deposits  to  state  banks  by  President 
Jackson  in  1833  was  the  voluntary  use  of  a  system  which 
would  necessarily  have  come  into  operation  at  the  expira- 
tion of  the  bank  charter.  For  a  few  years,  as  we  have 
seen,  the  system  was  used  without  legislative  sanction, 
and  its  compulsory  employment,  caused  by  the  downfall 
of  the  United  States  Bank,  was  the  next  step  toward  the 
policy  of  an  independent  treasury.  To  trace  the  history 
of  this  step  and  its  influence  in  the  evolution  of  the  sub- 
treasury  will  be  our  effort  in  the  next  chapter. 

25 


Chapter  II. — The  State  Banks  as  Depositaries. 

THE   REMOVAI^  OF   THE   PUBLIC   DEPOSITS   AND   THE   SPECIE 

CIRCULAR. 

There  appeared  to  be  no  reason  for  thinking  that  the 
local  banks  would  be  more  faithful  to  their  trust  if  given 
another  trial  than  they  had  been  before.  In  fact,  if  we 
may  trust  Benton,  such  was,  perhaps.  President  Jackson's 
opinion ;  for  Benton  seems  to  intimate  «  that  he  regarded 
the  plan  of  using  the  banks  as  depositaries  as  a  temporary 
expedient,  and  looked  to  the  ultimate  separation  of  the 
Government  from  all  banks.  But  if  the  President 
contemplated  this  separation,  he  must  have  seen  that 
its  accomplishment  was  impossible. 

In  September,  1833,  Mr.  Roger  B.  Taney,  who  had  been 
appointed  Secretary  of  the  Treasury  to  carry  out  the 
President's  policy  with  reference  to  the  bank,  ordered 
the  collectors  of  revenue  to  cease  depositing  in  the  bank 
of  the  United  States  and  to  employ  designated  state  banks 
for  that  purpose.''  Secretary  Taney's  alleged  reasons  for 
this  action  were,  briefly,  that  public  opinion  was  against 
the  bank ;  that  it  would  be  better  to  withdraw  the  deposits 
gradually  than  to  do  it  suddenly  when  the  bank  charter 
expired ;  that  the  bank  had  brought  about  a  bad  condition 
of  the  market  and  oppressed  the  state  banks  by  taking 
away   their   specie.     Strictly   speaking,   the   government 

oCf.  Thirty  Years'  View,  I:  553. 

b  Ex.  Docs.  23d  Cong.,  ist  sess.,  No.  2:  33. 

26 


Independent   Treasury  of  the    United  States 

deposits  were  not  "removed"  from  the  United  States 
Bank.  The  Government  simply  ceased  depositing  its 
receipts  there;  and  the  withdrawal  of  what  was  already 
in  the  bank  took  place  in  the  ordinary  course  of  govern- 
ment business. 

The  use  of  the  state  banks  as  depositaries  began  again 
in  October,  1833.  There  was  no  law  regulating  the  use 
of  these  banks,  and  therefore  the  public  moneys  were  for 
a  time  practically  under  the  control  of  the  President  and 
the  Secretary  of  the  Treasury.  It  fell  to  them  to  select 
the  banks  to  be  intrusted  with  the  public  deposits  and 
to  name  the  conditions  on  which  they  should  be  received 
and  kept.  Contracts  were  made  by  the  Secretary  with 
selected  banks,  according  to  which  the  banks  were  to  give 
security  for  the  government  money  whenever  the  deposits 
should  exceed  one-half  the  bank  capital  paid  in.  In 
addition,  the  Government  reserved  the  right  to  demand 
security  whenever  it  was  though  advisable,  even  if  the 
deposits  did  not  exceed  the  sum  mentioned.  The  banks 
further  agreed  to  perform  for  the  Government  all  the 
services  formerly  rendered  by  the  bank  of  the  United 
States,  to  render  weekly  reports,  and  to  submit  to  exam- 
inations when  the  Secretary  thought  necessary. 

The  banks  also  undertook  by  mutual  agreement  to 
honor  one  another's  notes  and  drafts,  thus  seeking  to 
provide  a  "general  currency  at  least  as  sound  as  that  of 
the  bank  of  the  United  States."  They  were  forbidden 
to  issue  small  notes  and  were  required  to  keep  one-third 
of  their  reserve  in  specie.  The  problem  before  the  Gov- 
ernment was  to  make  regulations  which  should  secure 
the  safety  of  its  deposits  and  to  provide  a  circulation  of 

27 


National    Monetary     Commission 

state  bank  notes  to  replace  the  $35,000,000  «  soon  to  be 
withdrawn  by  the  national  bank. 

In  his  report,  submitted  in  December,  1834,  Secretary 
Taney  urged  on  Congress  the  necessity  for  an  act  regu- 
lating the  deposits,  but  nothing  was  done  about  the 
matter.  A  bill  for  the  purpose  did,  indeed,  pass  the 
House,  but  met  its  death  in  the  Senate  on  the  report  of 
the  Finance  Committee  that  it  ought  not  to  pass,  mainly 
because  its  passage  would  indicate  acquiescence  on  the 
part  of  the  Senate  in  the  course  pursued  by  the  Execu- 
tive. The  provisions  of  the  bill  were  also  regarded  as 
inadequate  for  safety. 

The  use  of  the  state  banks  selected  by  Secretary  Taney 
continued,  therefore,  until  the  middle  of  1836,  when 
Congress  passed  an  act  embodying  the  recommendations 
made  by  Mr.  Taney  two  or  three  years  before,  author- 
izing the  Secretary  of  the  Treasury  to  select  state  banks 
as  depositaries.  He  was  required  to  find  one  in  each 
State  and  Territory.  Certain  stipulations  were  made  as 
to  the  conditions  of  receipt  and  disbursement  of  the 
public  money  and  concerning  the  redemption  of  the 
banks'  own  currency,  together  with  proper  requirements 
as  to  regular  statements  of  the  condition  of  the  banks. ^ 
The  banks  which  could  not  pay  specie  were  to  be  dropped 
from  the  list  of  depositaries.  The  bill  finally  passed  was 
identical  with  that  which  had  been  defeated  in  the  Senate 
two  years  before. 

In  consequence  of  this  act  the  number  of  depositaries 
increased  steadily.     Political  influence  in  currency  mat- 

o  Young,  A    W. :  American  Statesman,  666. 
&  U.  vS.  Revised  Statutes,  V:  52 


Independent   Treasury  of  the    United    States 

ters  was  at  that  time  so  powerful  that  the  Secretary  was 
not  able  to  adhere  strictly  to  the  provisions  of  the  law. 
More  money  was  left  on  deposit  in  some  banks  than  the 
law  permitted,  there  was  delay  in  honoring  drafts,  the 
provision  forbidding  the  use  of  banks  which  had  in  cir- 
culation notes  below  $5  was  not  strictly  enforced,  and 
in  other  matters  the  law  was  departed  from. 

A  circular  letter  of  the  Treasury  Department  to  the 
deposit  banks,  September  26,  1833,  said:  "The  deposits 
of  public  money  will  enable  you  to  afford  increased 
facilities  to  commerce  and  to  extend  your  accommoda- 
tions to  individuals."  It  also  recommended  "merchants 
engaged  in  foreign  trade"  as  the  most  deserving  recipi- 
ents of  extended  credit.  The  invitation  of  the  Secretary 
of  the  Treasury  to  the  banks  to  use  the  public  money  as 
a  basis  for  enlarging  their  discounts  is  interesting,  in 
view  of  the  fact  that,  in  the  minds  of  the  supporters  of 
the  administration,  such  use  of  them  by  the  national 
bank  had  constituted  one  of  the  chief  grievances  against 
it.  The  hint  was  not  needed,  however.  New  banks 
came  into  existence  every  day,  and  all  increased  their 
discounts  rapidly.  In  the  eight  years  between  1830  and 
1838  the  bank  capital  of  the  country  increased  from 
$145,192,268  to  $290,772,091,  deposits  rose  from 
$55>559.928  to  $127,397,185,  and  discounts  and  loans 
from  $200,451,214  to  $525,1 1 5, 702. «  There  was  a  large 
surplus  in  the  Treasury,  and  the  deposits  in  the  banks 
were  therefore  excessive.  They  were  tacitly  assured  that 
the  Government  would  not  draw  on  its  balances,   and 

o  Sumner,  W.  G.:  History  of  American  Currency,  123.  Bolles,  A.  S.: 
Financial  History  of  the  United  States,  II:  346. 

29 


National     Monetary     Commission 

these  were  therefore  left  for  their  use  in  speculation. 
Previous  to  the  issue  of  the  specie  circular  in  1836  bank 
notes  were  received  by  the  land  office,  and  being  depos- 
ited in  the  banks  became  again  the  basis  of  discounts  to 
land  speculators. 

Signs  of  a  coming  storm  had  been  gathering  for  a  con- 
siderable time.  Imports  had  swollen  from  $101,030,000 
in  1832  to  $189,980,000  in  1836,  an  increase  of  87  per 
cent.  The  customs  receipts  of  1836  exceeded  by  44  per 
cent  those  of  the  year  1834,  and  the  sales  of  the  public 
lands  for  1836  were  for  the  only  time  in  the  history  of 
the  country  in  excess  of  the  customs  receipts.  The  large 
importations  were  in  this  case  an  indication  of  rising 
prices,  of  which  foreign  manufacturers  were  hastening  to 
take  advantage.  The  upward  trend  of  prices  came  from 
the  inflation  of  the  currency  by  excessive  issues  of  bank 
notes.  The  increased  sales  of  public  lands  were  another 
sign  of  inflation.  It  was  by  means  of  these  increased 
sales  that  the  Government  was  enabled  to  get  rid  of  its 
debt  and  found  itself  the  possessor  of  the  surplus  of 
millions  that  were  distributed,  or  "deposited,"  among  the 
States  in  1837. 

But,  as  usual,  these  signs  of  a  coming  storm  were  un- 
heeded by  all  save  a  few.  In  1836  came  the  inevitable 
results — a  marked  rise  of  prices  and  rife  speculation.  The 
inflation  bubble  grew  rapidly  greater  until,  in  1837,  it  burst, 
scattering  ruin  in  all  directions.  Nearly  all  the  banks 
failed. 

The  catastrophe  was  probably  hastened  by  several 
acts  of  the  Executive,  which  received  severe  condemnation 
at  the  time,  but  must  in  our  better  light  meet  with  ap- 

30 


Independent   Treasury  of  the   United   States 

proval  and  commendation  in  spite  of  their  immediate 
effects.  By  order  of  the  Secretary  of  the  Treasury  the 
receipt,  after  September  30,  1835,  of  bank  notes  of  a  de- 
nomination less  than  $5  had  been  prohibited.  In  the  fol- 
lowing year  their  payment  to  public  officers  or  creditors 
was  prohibited,  and  no  notes  less  than  $10  were  to  be 
received  or  paid  by  the  Government  after  July  4,  1836. 
Moreover,  the  deposit  banks  were  ordered  to  make  one- 
fifth  of  every  payment  which  did  not  exceed  $500  in  gold, 
if  so  desired  by  the  creditor.  They  were  also  requested 
to  cease  issuing  notes  below  the  denomination  of  $5  by 
July  4,  1836,  and  below  $10  by  March  3,  1837.  The  pur- 
pose of  these  regulations  was  "to  render  the  currency  of 
the  country  more  safe,  sound,  and  uniform."  Of  course 
the  immediate  result  intended  to  be  produced  was  the 
displacement  of  small  notes  by  coin.  The  orders  were  an 
effort  to  create  a  specie  circulation.  And  within  the  lim- 
its of  denominations  chosen  there  is  no  more  efficacious 
method  of  replacing  specie  with  paper,  or  vice  versa,  than 
the  prohibition  of  such  coins  or  notes  of  the  assigned 
denominations  as  are  in  common  use. 

These  orders  of  the  Treasury  Department  were  supple- 
mented with  the  famous  "specie  circular"  issued  July  1 1, 
1836,  which  raised  pubhc  excitement  to  a  higher  pitch 
probably  than  any  incident  in  the  bank  war,  unless  we 
except  the  removal  of  the  deposits.  The  object  of  this 
circular  was  to  prevent  the  absorption  of  the  public  lands 
by  speculators  and  to  check  the  accumulation  in  the  Treas- 
ury of  bank  notes,  many  of  which  would  doubtless  prove 
inconvertible.  It  required  payments  for  public  lands  to 
be  made  in  gold  and  silver.     "  The  best  justification  of  this 

31 


National     Monetary     Commission 

measure  was  that  $10,000,000  of  paper  on  its  way  to  the 
land  office  was  arrested  by  this  circular."  Between  Au- 
gust 1 6  and  December  1 5  exceptions  were  to  be  made  in 
cases  of  purchases  not  greater  than  320  acres.  After  the 
15th  of  December  the  operation  of  the  order  was  uncon- 
ditional. 

This  famous  "circular"  pricked  the  bubble  of  inflation. 
It  is  unfair  to  say  that  the  responsibility  for  the  panic  that 
followed  must  be  laid  at  the  door  of  these  orders.  The 
panic  was  the  result  of  the  tremendous  inflation,  and  would 
have  come  in  any  case.  The  specie  circular  simply  aided 
in  hastening  the  explosion,  thereby  probably  making  its 
evils  less  than  they  would  have  been  had  credit  been  al- 
lowed to  be  inflated  to  its  self-bursting  point.  Moreover, 
the  circular  had  the  good  effect  of  saving  the  public  lands 
from  the  grasp  of  speculative  monopoly  and  of  making  the 
losses  of  the  Government  less  than  they  would  have  been 
had  it  gone  on  receiving  worthless  notes.  The  measure 
had  a  beneficial  effect  from  the  social  standpoint  also  in 
saving  "  the  new  States  from  anon-resident  proprietorship, 
one  of  the  greatest  obstacles  to  the  advancement  of  a  new 
country,  and  the  prosperity  of  an  old  one."*" 

Another  measure  that  had  a  large  influence  in  precipi- 
tating the  crisis  was  the  law  for  the  deposit  of  the  surplus 
revenue  among  the  States.  ^    Speaking  of  this,  Schurz  says  i*^ 

"The  effect  of  the  law  was  to  hurry  on  a  crisis.  The 
distribution  of  the  public  deposits  among  the  '  pet  banks ' 
had  served  to  place  capital  arbitrarily  in  different  parts  of 

a  Jackson's  Message,  24th  Cong.,  2d  sess. 

b  Bourne,  E.  G. :  The  Distribution  of  the  Surplus  Revenue  in  1837. 

c  Henry  Clay,  II:i2i. 


32 


Independent   Treasury  of  the    United  States 

the  country,  without  much  regard  to  the  requirements  of 
legitimate  business.  The  regulations  imposed  upon  the 
deposit  banks  by  the  new  law,  especially  the  provision 
that  the  public  deposits  in  no  one  bank  should  exceed 
three-fourths  of  its  paid-up  capital,  led  in  some  cases  to 
an  equally  arbitrary  dislocation  of  funds  from  banks 
which  had  an  excess  of  deposits  to  other  banks  in  other 
places  which  had  less  than  the  amount  allowed.  But  the 
distribution  of  the  treasury  surplus  among  the  several 
States  produced  this  effect  of  arbitrary  dislocation  on  a 
larger  scale.  On  January  i,  1837,  the  surplus  available 
for  distribution  amounted  to  $37,468,859.  That  surplus 
was  nominally  in  the  banks,  but  really  in  the  hands  of 
borrowers,  who  used  it  for  legitimate  business  or  specu- 
lation. Withdrawing  it  from  the  banks  meant,  there- 
fore, withdrawing  it  from  the  business  men  or  speculators 
who  had  borrowed  it.  The  funds  so  withdrawn  were 
made  for  some  time  unavailable." 

The  failure  of  the  banks  did  not  occur,  however,  until 
May,  1837,  after  Jackson  had  retired  from  the  presidential 
chair.  The  general  suspension  necessitated  a  meeting  of 
Congress,  for  the  federal  officials  could  lawfully  receive 
and  pay  out  the  notes  of  specie-paying  banks  only;  and 
as  the  deposit  banks  had  suspended  with  the  others,  the 
fiscal  machinery  of  the  Government  was  stopped,  and 
action  by  Congress  was  therefore  needed. 

PROPOSAL  OF  THE  INDEPENDENT  TREASURY  BY  VAN  BUREN. 

President  Van  Buren  summoned  an  extra  session  for 
September  4,  1837.  In  his  message  the  President  recalled 
the  history  of  the  various  methods  of  keeping  the  public 

41969°— 10 3  3  J 


National    Monetary     Commission 

money,  and  remarked  that,  although  advocates  of  the  use 
of  national  and  state  banks  were  still  to  be  found,  "it  is 
apparent  that  the  events  of  the  last  few  months  have 
greatly  augmented  the  desire,  long  existing  among  the 
people  of  the  United  States,  to  separate  the  fiscal  opera- 
tions of  the  Government  from  those  of  individuals  or  cor- 
porations." Van  Buren  himself  argued  against  the  rees- 
tablishment  of  a  national  bank,  on  the  ground  that  the 
people  had  declared  against  it  in  two  elections.  He  main- 
tained, too,  that  the  United  States  Bank  did  not  or  could 
not  prevent  overissue  and  depreciation,  an  assertion 
which  could  hardly  be  sustained  by  the  facts,  at  least  in 
the  days  of  the  honest  management  of  the  bank's  affairs. 
He  further  declared  that  it  was  no  part  of  the  Govern- 
ment's business  to  regulate  domestic  exchange,'"  and 
therefore  advocated  the  entire  separation  of  the  Govern- 
ment from  the  banks,  proposing  that  it  collect,  keep,  and 
disburse  its  own  funds.  The  possibility  of  doing  so  was 
greater  than  ever  before  and  continually  growing  more  so 
as  the  country  developed,  because  the  difficulties  of  trans- 
fer were  constantly  being  lessened.  This  was  a  recom- 
mendation of  the  independent  or  constitutional  treasury, 
as  it  was  called  by  its  friends,  or  the  subtreasury,  as  its 
opponents  named  it.  The  system  was,  in  fact,  virtually  in 
operation  already;  for,  under  the  circumstances,  it  had 
become  necessary  for  the  Government  to  discontinue  the 
use  of  state  banks  as  depositaries  and  to  revert  to  the 
older  method  of  leaving  the  money  with  the  receivers  and 
collectors,  on  whom  drafts  were  directly  made.    The  Gov- 

o  Contrast   the   statement   of  Secretary   Shaw   in    1907.      See  Finance 
Report,  1906,  p.  40. 

34 


Independent    Treasury  of  the    United  States 

eminent  deposits,  of  course,  could  not  be  withdrawn 
immediately  from  the  banks,  and  therefore  the  adminis- 
tration was  much  hampered.  Late  in  1837  Congress 
passed  an  act  authorizing  the  Secretary  to  withdraw  the 
deposits,  but  he  was  obliged  under  the  circumstances  to 
be  somewhat  indulgent .«  Secretary  Woodbury  informed 
Congress  in  his  report,  that  although  on  the  suspension  of 
specie  payments  six  banks  had  been  retained  as  deposi- 
taries, part  of  the  public  money  was  kept  as  a  special 
deposit  in  Washington,  part  at  the  mint,  and  the  rest 
with  the  officers  collecting  it.  The  Secretary  urged  on 
Congress  either  an  enlargement  and  adaptation  of  this 
method,  which  he  was  employing  on  his  own  responsi- 
bility, or  a  new  organization  of  commissioners  and  receivers- 
general,  "to  gather  the  collections  to  more  central 
points,  and  to  keep  the  public  money,  or  such  as  could  not 
be  kept  safely  and  expended  conveniently,  in  the  hands  of 
the  collecting  officers." 

The  President  and  the  Secretary  were  not  alone  in 
suggesting  plans  of  relief  and  future  action.  Congress  was 
deluged  with  memorials  and  petitions  suggesting  plans  of 
one  kind  and  another.  Some  had  points  of  merit,  but 
most  were  chacterized  by  that  sublime  indifference  to 
history,  experience,  and  economic  principles  that  is  a 
marked  feature  of  the  empiric  schemes  of  which,  in  all 
such  crises,  political  charlatanism  and  ignorance  are 
prolific.^ 

The  schemes  actually  considered  in  Congress  were  three : 
The  revival  of  a  national  bank;  the  revival,  or  continuance, 

o  U.  S.  Stats.  L  ,  V  :  206. 

bpor  an  interesting  specimen  see  Sen.  Doc.  No.  6,  25th  Cong.,  ist  sess. 

35 


National     Monetary     Commission 

of  the  deposit  system  established  by  the  act  of  June  23, 
1836;  and  the  keeping  of  the  public  money  by  public 
officers.  The  last,  or  independent  treasury  plan,  which,  as 
already  said,  received  the  support  of  President  Van  Buren, 
has  been  proposed  as  long  ago  as  1834,  by  Senator  Gordon, 
of  Virginia.  It  was  dropped  at  that  time  from  lack  of 
support,  but  was  now  brought  forward  as  the  measure  of 
the  administration  by  Senator  Silas  Wright, «  of  New 
York,  who  had  been  a  stanch  and  consistent  supporter 
of  the  Jacksonian  financial  policy.  The  bill  now  proposed 
was  entitled  a  bill  "imposing  additional  duties  as  deposi- 
taries, in  certain  cases,  on  public  officers,"  and  its  provi- 
sions, as  amended  during  discussion,  were  essentially 
those  that  afterwards  became  the  law  of  the  land  in  the 
final  establishment  of  the  constitutional  treasury,  or  inde- 
pendent treasury,  or  subtreasury,  as  it  was  variously 
called. 

The  measure  was  keenly  debated,  the  specie  clause, 
requiring  public  dues  to  be  paid  in  specie,  being  the  main 
object  of  attack.  The  adoption  of  this  clause,  it  was 
argued,  would  leave  the  bank  notes  in  the  hands  of  the 
people  and  give  the  specie  to  the  Government.  It  was 
argued  that  convertible  state  bank  notes  should  be  received 
for  government  dues ;  that  the  adoption  of  the  independent 
system  would  render  the  public  money  insecure;  that  it 
would  open  the  way  to  favoritism  in  such  ways  as,  for 
ifistance,  accommodating  political  friends  in  the  payment 
of  customs;  that  it  would  contract  the  currency;  and, 
finally,  that  it  would  increase  executive  patronage  and  so 
give  the  President  too  much  power.     The  Whigs,  more- 

oGillet,R.  H.:   Life  and  Times  of  Silas  Wright,  I:  Ixiv,  and  elsewhere. 

36 


Independent   Treasury  of  the   United  States 

over,  represented  the  measure  as  an  attack  on  the  banks 
and  the  whole  credit  system  of  the  coimtry,  and  designated 
it  as  an  experiment,  novel  and  contrary  to  the  habitsof  the 
people.  Webster  characterized  the  bill  as  a  backward 
step,  from  dependence  on  credit  to  bolts  and  bars.  "The 
use  of  money,"  he  further  said,  "  is  in  the  exchange.  It  is 
designed  to  circulate,  not  to  be  hoarded.  All  the  Govern- 
ment should  have  to  do  with  it  is  to  receive  it  to-day, 
that  it  may  pay  it  away  to-morrow.  It  should  not  receive 
it  before  it  needs  it,  and  it  should  part  with  it  as  soon  as 
it  owes  it.  To  keep  it — that  is,  to  detain  it,  to  hold  it 
back  from  general  use,  to  hoard  it,  is  a  conception  belong- 
ing to  barbarous  times  and  barbarous  governments."" 
That  is  sound  doctrine  even  for  to-day. 

On  the  other  side  it  was  urged  that  under  the  proposed 
system  the  public  money  would  be  more  secure,  that  a 
specie  circulation  would  be  promoted,  and  the  currency 
made  more  uniform;  that  the  action  of  the  banks  had 
made  the  separation  of  the  Government  from  them 
necessary,  and  that  a  government  was  not  worthy  of  its 
name  if  it  could  not  manage  its  own  finances.  Further, 
it  was  maintained,  the  failure  of  the  banks  might  at  any 
time  sweep  the  public  deposits  away  and  jeopardize  the 
credit  of  the  country;  and,  finally,  that  the  independent 
treasury  system  would  be  more  plain  and  simple  in  its 
arrangements,  and  truer  to  the  spirit  of  the  Constitution. 
The  bill  succeeded  in  passing  the  Senate,  but  met  with 
defeat  in  the  House,  being  laid  on  the  table  by  a  vote  of 
1 20  to  107.  The  contest  over  it  showed  the  Whigs 
ranged  in  defense  of  the  use  of  state  banks,  which  they 

o  Speech  on  the  subtreasury,  delivered  in  the  Senate  March  12,  1838. 

37 

6   -i.  ^  «•/  \y 


National     Monetary     Commission 

formerly  opposed,  and  the  friends  of  the  administration 
supporting  the  measure  which  but  lately  they  had  con- 
demned. During  the  three  months  that  elapsed  before 
the  first  regular  session  of  the  Twenty-fifth  Congress 
began,  the  measure  apparently  did  not  gain  aught  in  the 
estimation  of  the  public.  The  subject  had,  indeed,  been 
a  matter  of  wide  and  earnest  public  discussion ;  and  on  it, 
aside  from  mere  political  argument,  much  that  was  logic- 
ally sound  had  been  said  and  written.  The  most  elaborate 
defense  of  the  plan  was  set  forth  by  William  M.  Gouge  in 
a  pamphlet  "  which  deserves  consideration  as  the  best 
exposition  of  the  aims  and  hopes  of  the  promoters  of  the 
system. 

Gouge  estimated  the  number  of  depositaries  that  would 
be  necessary  for  the  transaction  of  the  business  of  the 
Treasury  at  36,  their  locations  to  be  those  of  the  banks 
formerly  used  for  the  purpose.  He  thought  that  the 
expense  would  be  less  than  that  of  the  banks,  probably 
aggregating  not  more  than  $101,600.  "So  plain  would 
be  the  accounts,"  he  goes  on  to  say,  "that  we  might 
choose  for  chief  bookkeepers  of  these  subtreasuries  the 
disciples  of  the  ingenious  cordwainer  who  daily  threw 
into  the  leg  of  one  boot  a  slip  containing  a  statement  of 
his  receipts  for  the  day,  and  into  the  leg  of  the  other  a 
slip  containing  a  statement  of  his  expenditures." 

The  probabilities  of  loss,  Gouge  declared,  would  be  less 
with  independent  depositaries  than  with  banks;  for  there 
would  be  less  loss  from  fire,  since  the  deposits  would  be 
in    specie;  less    from    peculation,    because   the    accounts 

o  An  Inquiry  into  the  Expediency  of  Dispensing  with  Bank  Agency  and 
Bank  Paper  in  the  Fiscal  Concerns  of  the  United  States,  Philadelphia, 
1837  :56. 

38 


Independent   Treasury  of  the   United  States 

would  be  simpler;  and  less  from  robbery,  because  thieves 
could  carry  off  but  little  of  the  metallic  money,  on  account 
of  its  weight.  To  the  objection  that  the  system  would 
lock  up  money  the  author  replied  that  there  should  be  no 
surplus  to  lock  up.  The  inconvenience  of  transfer  could 
be  obviated,  he  declared,  by  the  use  of  drafts;  and  gold 
and  silver  payments  could  be  easily  maintained.  Gouge 
held,  contrary  to  the  general  opinion,  that  the  system 
would  decrease  executive  patronage.  These  views  of 
Gouge's  were  exceedingly  interesting  because  they  show 
how  widely  even  the  most  intelligent  of  the  advocates  of 
the  independent  treasury  miscalculated  the  scope  and 
influence  of  the  system  and  underrated  the  growth  of 
the  fiscal  life  of  the  Government. 

In  1838  the  practice  of  leaving  the  public  money  with 
the  collecting  officers  was  pretty  general,''  yet  some  state 
banks  continued  to  be  employed.  Where  suitable  banks 
could  be  found,  the  Secretary  used  them  as  depositaries, 
under  the  terms  of  the  act  of  January  23,  1836.  If  a 
bank  could  not  comply  with  the  requirements  of  that  law, 
the  public  money  was  sometimes  left  with  it  as  a  special 
deposit.  But  by  far  the  larger  part  of  the  public  money 
was  kept,  as  has  been  remarked,  in  the  hands  of  the 
collectors  and  receivers.  About  four-fifths  of  the  expendi- 
tures for  the  year,  or  nearly  $20,000,000,  were  made  by 
drafts  on  collecting  officers.^  That  it  was  thus  kept 
proved  fortunate  when  the  banks  collapsed  again  in  1839. 
Their  recovery  from  the  panic  of  1837  had  been  too  rapid. 
Of  nearly  i  ,000  banks  in  the  country,  including  branches, 

o>  Finance  Report,  December  5,  1838. 

ft  C£.  Remarks  of  President  Van  Buren,  in  his  message,  Dec.  2,  1839. 

39 


National    Monetary     Commission 

343  suspended  specie  payments  entirely  in  1839,  56  went 
out  of  business,  and  62  resorted  to  partial  suspension. 
As  before,  the  larger  number  of  these  was  in  the  West 
and  South. 

Congress  assembled  again  on  the  4th  of  December. 
President  Van  Buren  again  recommended  his  favorite 
measure,  and  again  it  was  brought  before  the  Senate 
by  its  champion,  Mr.  Wright,  but  only  to  have  its  suc- 
cess in  the  Senate  once  more  offset  by  defeat  in  the 
House  of  Representatives.  The  debate  was  partici- 
pated in  by  Clay,  Calhoun,  Webster,  and  others,  in 
speeches  of  the  power  and  brilliancy  that  characterized 
their  great  authors,  but  the  arguments  were  mainly 
political. 

The  subject  was  again  brought  up  in  the  session  of 
1839-40,  after  it  had  been  urged,  as  usual,  by  President 
Van  Buren  in  his  message.  And  then  at  last  the  bitter 
struggle  came  temporarily  to  an  end.  The  independent 
treasury  was  established.  It  barely  escaped  its  former 
fate  in  the  House;  for  it  passed  that  body,  June  30, 
1840,  after  long  and  bitter  debate,  only  by  the  small 
majority  of  17  in  a  total  vote  of  231.  According  to  the 
act,  one-fourth  of  all  government  dues  had  to  be  paid 
in  specie  after  June  30,  1840,  and  an  additional  one- 
fourth  had  to  be  so  paid  each  successive  year  until  the 
whole  should  become  thus  payable. 

Thus  was  at  length  established  the  system  for  which 
Van  Buren  had  risked  his  office.  For  the  idea  was 
adopted  by  him  as  his  own,  and  although  he  pushed  it 
perse veringly  on  to  success,  in  the  very  achievement  of 
that   success  "it  helped  sink  the  originator."     But  the 

40 


Independent   Treasury  of  the   United   States 

country  owes  a  debt  of  gratitude  to  him  for  his  persist- 
ent adherence  to  a  "  hard-money  "  system.  The  sever- 
ance of  the  Government  from  the  banks,  as  banks  were 
then  constituted,  relying  largely  as  they  did  on  govern- 
ment support  for  the  convertibility  of  their  notes,  was 
the  means  of  removing  a  large  element  of  uncertainty 
from  the  credit  of  the  Government,  and  of  insuring  to 
the  currency  the  soundness  for  which  the  people  had 
struggled  so  long.  It  was,  therefore,  an  act  of  wise 
statesmanship,  commendable  to  its  promoter,  and  worthy 
of  the  gratitude  of  all  who  believe  in  maintaining  the 
credit  of  the  country;  and  a  large  share  of  this  credit 
must  be  accorded  to  Mr,  Van  Buren. 

REPEAL^   OF   THE   SUBTREASURY   LAW. 

The  shortness  of  Harrison's  administration  prevented 
any  action  on  the  subtreasury  and  the  currency.  But 
Tyler,  on  his  accession,  declared  his  intention  of  adher- 
ing to  the  policy  which  Harrison  and  the  party  were 
known  to  favor.  Under  a  proclamation  which  had 
been  issued  by  Harrison,  Congress  assembled  in  special 
session  on  the  last  day  of  May,  184 1.  In  calling  atten- 
tion in  his  message  to  the  state  of  the  revenue  and  the 
currency,  Tyler  proposed  no  definite  plan  of  reform. 
The  people  had,  he  thought,  sustained  Jackson  in  his 
course  against  the  national  bank;  the  state-bank  deposit 
policy  and  the  subtreasury  had  both  been  condemned; 
therefore  he  left  the  whole  question  to  Congress,  saying: 

"  I  shall  be  ready  to  concur  with  you  in  the  adoption 
of  such  a  system  as  you  may  propose,  reserving  to  myself 
the  ultimate  power  of  rejecting  any  measure  which  may 

41 


National     Monetary     Commission 

in  my  view  of  it  conflict  with  the  Constitution,  or  other- 
wise jeopard  the  prosperity  of  the  country." 

Bills  were  immediately  introduced  into  Congress  for 
the  repeal  of  the  subtreasury  act  and  for  the  incorpora- 
tion of  a  bank.  As  usual  a  large  number  of  petitions  and 
resolutions  for  and  against  the  movement  were  sent  to 
Congress,  but,  as  usual  also,  they  could  be  regarded  as  only 
expressions  of  party  fealty  and  not  as  intelligent  opinions 
based  on  careful  consideration  of  the  merits  of  the  ques- 
tion. During  the  year  since  its  establishment  the  sub- 
treasury  system  had  worked  more  smoothly  than  migjit 
have  been  fairly  expected.  Secretary  Ewing  took  oc- 
casion, in  a  report  in  July,  1840,  to  argue  against  the 
system.  He  maintained  that  it  exposed  the  government 
funds  to  risk  of  loss;  that  it  was  cumbrous,  expensive, 
and  inconvenient;  that  it  tended  to  center  disburse- 
ments in  some  eastern  cities,  especially  New  York;  and 
that  it  injured  business  by  contracting  the  currency. 
He  reviewed  the  history  of  the  government  policy  in  the 
matter  of  keeping  its  own  money,  recalling  the  fact  that 
there  had  been  two  periods  of  twenty  years  each  in  which 
a  national  bank  was  used,  and  intervals,  comprising  a 
period  of  nine  years,  in  which  state  banks  were  employed, 
and  that  during  the  rest  of  the  time  the  funds  were  ad- 
ministered by  individual  officers  and  agents. 

The  Secretary  said  that  the  losses  under  the  state  bank 
system  from  181 1  to  181 6  had  been  about  $1,000,000;" 
from  1833  to  1837  there  had  been  no  money  loss,  but  much 
inconvenience.  There  had  been  no  loss  through  either  of 
the  national  banks,  and  no  delay  or  expense  in  trans- 

a  Finance  Reports,  1833  and  1837. 
42 


Independent   Treasury  of  the   United   States 

mitting  public  money,  so  far  as  the  banks  were  concerned. 
The  Secretary  recommended  the  estabhshment  of  a  bank, 
for  which  he  afterwards  submitted  a  plan.  In  fact,  the 
results  of  the  trial  of  the  sub  treasury  failed  to  justify 
any  of  the  prophecies  of  the  Whigs.  It  may  be  fairly 
said,  however,  that  this  was  as  much  the  result  of  circum- 
stances as  of  the  merits  of  the  system;  for  the  conditions 
were,  on  the  whole,  favorable  to  success.  However,  the 
sub  treasury  act  was  repealed  August  13,  1841,  thus  neces- 
sitating a  return  to  the  use  of  state  banks.  The  condi- 
tions made  with  the  banks  were  in  substance  what  Taney 
had  agreed  on  seven  or  eight  years  before.  The  banks 
had  become  so  much  safer  that  there  was  general  satis- 
faction, and  the  Secretary  wrote,  in  response  to  a  Senate 
inquiry,  that,  in  his  opinion,  the  public  money  was  safe 
and  that  he  had  no  reason  to  apprehend  any  loss." 

The  truth  of  the  matter  is  that  the  disasters  of  the 
panic  had  produced  a  healthier  mode  of  doing  business, 
both  banking  and  mercantile,  and  public  deposits  were 
therefore  not  made  a  basis  of  speculative  mania  such  as 
had  culminated  in  the  panic  of  seven  years  before.  The 
safety  of  the  deposits  was  therefore  no  longer  an  issue,  but 
this  was  due  to  the  improvement  in  banking  morals  and 
knowledge. 

A  bill  was  immediately  reported  by  Henry  Clay  for 
the  establishment  of  a  bank.  Clay  preferred  a  bank  after 
the  old  pattern,  but  yielded  to  the  wishes  of  the  President 
and  his  friends  and  recommended  an  institution  substan- 
tially such  as  they  desired.  The  course  pursued  by 
President  Tyler  with  reference  to  the  establishment  of  the 

oSen.  Doc.  No.  88,  28th  Cong.,  2d  sess. 
43 


National     Monetary     Commission 

bank  was  curious.  He  vetoed  Clay's  bill,  although  it  had 
been  passed  by  both  Houses  in  tlj.e  confident  expectation 
of  his  approval.  He  asked  his  Secretary  of  the  Treasury 
to  draft  a  bill,  and  his  request  was  complied  with,  even 
to  naming  the  proposed  institution  to  suit  his  whim.  He 
approved  the  plan  when  read  at  a  Cabinet  meeting.  Con- 
gress passed  it  unchanged  except  in  two  points,  and  sent  it 
to  him.  He  talked  over  it,  wept  over  it,  prayed  over  it — 
and  vetoed  it,  on  constitutional  grounds  that  militated 
equally  against  the  proposal  of  Secretary  Ewing,  which  he 
had  approved. 

Yet  it  was  fortunate,  perhaps,  that  both  the  bills  men- 
tioned were  defeated,  for  either  of  them  would  have  been 
likely  to  work  great  mischief.  Some  of  the  provisions  of 
Ewing's  proposed  plan  were  as  follows:  The  bank,  which 
must  be  in  the  District  of  Columbia,  was  to  have  a  capital 
of  $30,000,000.  It  could  establish  branches  in  the  different 
States,  but  only  with  the  consent  of  the  States  and  under 
their  control.  The  government  subscription  of  $6,000,000 
was  to  be  in  "stock"  created  for  the  purpose,  and  the 
States  were  to  be  allowed  the  privilege  of  subscribing  in  a 
similar  way.  The  bank  was  to  perform  the  usual  duties  of 
a  fiscal  agent  of  the  Government,  and  all  government  debts 
were  to  be  discharged  by  checks  payable  in  the  notes  of 
the  bank,  which  were  also  receivable  for  government  dues. 
Dividends  were  to  be  limited  to  6  per  cent,  and  all  sur- 
plus above  $2,000,000  was  to  go  to  the  Government.  The 
bank  could  not  incur  a  debt  of  over  $20,000,000  more  than 
its  deposits,  or  make  loans  to  more  than  one  and  three- 
fourths  times  its  capital.  Its  specie  reserve  must  be  at 
least  one-third  of  its  circulation.     Its  deahngs  were  to  be 

44 


Independent   Treasury  of  the   United   States 

in  coin,  bullion,  notes,  and  inland  bills  of  exchange.  No 
loan  could  be  made  for  more  than  six  months,  and  no  debt 
could  be  renewed .  The  limit  of  a  government  loan  from  the 
bank  was  to  be  $3,000,000,  for  not  more  than  six  months. 
As  usual,  the  charter  was  to  be  for  twenty  years.  In  adopt- 
ing the  plan.  Congress  raised  the  dividend  rate  to  7  per 
cent,  stopped  all  discounts  and  loans  when  the  note  circula- 
tion amounted  to  three  times  the  specie  on  hand,  and 
rejected  the  provision  requiring  the  consent  of  the  States 
to  the  establishment  of  branches. 

In  criticism  of  this  plan  it  may  be  said,  first,  that  if  the 
Government  is  to  own  shares  at  all,  it  should  pay  in  its 
capital  Hke  any  other  stockholder.  This  same  mistake 
was  made  in  the  case  of  the  United  States  Bank.  In  its 
financial  aspect  it  resembles  the  conduct  of  railroad 
"  promoters  "  who  issue  stock  certificates,  a  certain  amount 
of  which  they  divide  among  themselves  without  paying  in 
a  dollar  of  the  capital.  It  was  an  effort  to  share  the  gain 
without  sharing  the  risk  of  loss.  The  burden  was  thrown 
on  the  other  stockholders.  Still,  this  was  less  vicious 
financially  than  some  of  the  other  provisions.  The  abso- 
lute prohibition  of  the  renewal  of  debts,  the  debt  limita- 
tions, and  the  support  given  to  the  credit  of  the  bank  notes 
by  the  government  credit  were  bad  features.  The  limita- 
tion placed  upon  loans  to  the  Government  was  a  ridiculous 
attempt  to  check  the  possible  abuse  of  executive  power 
and  patronage.  The  limitation  on  discounts,  if  put  into 
rigid  operation  on  the  verge  of  a  crisis,  would  have  pre- 
cipitated a  panic,  exactly  contrary  as  it  was  in  effect  to  the 
method  of  freely  discounting  at  such  times  that  has 
received  the,  sanction  of  experience  and  the  judgment  of 
wise  bankers. 

45 


National    Monetary     Commission 

THE     FINAL    ESTABUSHMENT     OF     THE     INDEPENDENT 
TREASURY. 

During  the  next  few  years  the  subject  was  less  discussed, 
as  it  was  supplanted  in  public  attention  by  the  questions 
of  the  tariff  and  the  annexation  of  Texas.  In  the  third 
session  of  the  Twenty-seventh  Congress,  however,  the 
matter  came  up  again.  The  Committee  of  Ways  and 
Means  made  a  report  on  the  President's  proposed  "  Plan 
of  an  exchequer,"  condemning  the  subtreasury,  passing 
by  the  state-bank  system  as  already  rejected  by  the 
people  and  as  unsafe  on  account  of  the  failure  of  the 
banks,  and  praising  the  old  national-bank  system.  The 
committee's  opinion  of  the  subtreasury  is  shown  by  the 
following  remarks:  "Its  model  may  be  found  in  the 
imperial  institutions  of  Darius,  the  King  of  Persia,  and 
its  principles  have  descended,  with  little  modification 
and  slight  improvement,  it  is  believed,  through  all 
governments  where  banks  do  not  exist,  and  are  now 
found  in  perfect  operation  in  the  island  of  Cuba." 

According  to  the  committee,  the  exchequer  plan  in  its 
details  was  essentially  the  subtreasury  with  certain 
banking  functions  added,  and  herein  lay  the  main  objec- 
tion to  the  scheme.  When  the  bill  came  before  Congress 
a  remarkable  amendment  was  submitted  by  one  member. « 
He  proposed  the  issue  of  $100,000,000,  bearing  interest 
for  ten  years  aX  2%  per  cent,  based  on  the  public  lands  as 
security  and  to  be  distributed  among  the  States  in  pro- 
portion to  their  respective  "  federal  numbers."  According 
to  this  plan,   "fiscal  agencies"   were  to  be  established, 

o Horace  Everett,  of  Vermont. 
46 


Independent   Treasury  of  the   United   States 

whose  beneficent  operations,  combined  with  the  blessings 
of  the  land  currency,  would  bring  on  a  millenium  of 
prosperity  of  which  later  advocates  of  "coining  all  the 
land  of  the  country"  never  dreamed.  The  proposed 
scheme  is  one  of  the  most  curious  of  the  monetary  vagaries 
that  have  been  brought  to  public  attention  in  our  short 
history  as  a  nation. 

During  all  this  time  the  government  officials  kept  the 
public  money  as  best  they  could.  That  is,  the  unlegalized 
system  of  government  agents  as  depositaries  continued, 
and  the  operations  of  the  Treasury  rested  on  the  law  of 
1789  and  the  resolutions  of  181 6.  Many  of  the  public 
officials  deposited  in  selected  banks. 

In  his  message  at  the  opening  session  of  the  Twenty- 
ninth  Congress,  President  Polk  revived  the  matter  and 
urged  the  reestablishment  of  the  subtreasury.  Secretary 
Walker  came  to  the  President's  aid  in  his  annual  report 
and  brought  forward  anew  the  arguments  so  often  presented 
against  the  use  of  banks.  Though  he  advocated  their 
complete  and  final  rejection,  he  pointed  out  the  uselessness 
of  establishing  a  constitutional  treasury  "  if  it  is  to  receive 
or  disburse  the  paper  of  banks."  The  proposed  measure 
again  underwent  earnest  public  discussion  and  again  met 
with  strenuous  opposition.  The  arguments  which  were 
brought  forward  were  pretty  much  the  same  as  had  been 
used  before,  but  the  long  discussion  enabled  them  to  be 
presented  in  a  more  complete  form.  It  was  again  urged 
in  favor  of  the  independent  treasury  that  the  union  of 
the  Government  with  the  banks  was  unconstitutional. 
The  constitutional  argument  on  both  sides  is  of  only 
historical  interest   now,   but   it  is   perhaps   worth  while 

47 


National    Monetary     Commission 

to  note  its  points.  The  constitutional  argument  for  the 
subtreasury  was  based  on  the  words  of  the  Constitution 
that  "no  money  shall  be  drawn  from  the  Treasury  but 
in  consequence  of  appropriations  made  by  law."  This, 
it  was  maintained,  meant  "a  substantive  treasury, 
substantial  treasurer,  and  a  real  treasurer."  Again,  the 
First  Congress,  in  establishing  the  Treasury  Department, 
declares  that  "it  shall  be  the  duty  of  the  Treasurer  to 
receive  and  keep  the  moneys  of  the  United  States."  Of 
course  the  argument  from  this  provision  depends  on  the 
logical  content  of  "receive"  and  "keep."  If  "keep"  is, 
as  the  adherents  of  the  proposed  system  urged,  to  be 
understood  literally,  why  not  also  "receive?"  But  for 
the  Treasurer  personally  to  handle  all  the  receipts  of  the 
Government  is  impossible.  Moreover,  what  is  the  literal 
meaning  of  "keep"  in  this  connection? 

The  whole  constitutional  argument  against  the  use  of 
banks  by  the  Government  was  but  a  phase  of  the  old  doc- 
trine of  states  rights  and  supremacy  which  prevented 
Congress  from  assuming  such  control  over  the  banking 
system  of  the  country  as  would  have  made  rt  safe,  would 
have  prevented  "wild-cat"  banking,  would  have  saved 
the  financial  good  name  of  the  country,  and  would  have 
made  the  subtreasury  system  unnecessary  by  making  the 
banks  as  safe  for  government  use  as  they  are  to-day. 

The  arguments  urged  in  favor  of  the  banks  were  the 
safer  keeping  and  the  free  and  safer  transmission  of  the 
public  moneys;  the  easier  and  more  inexpensive  collec- 
tion of  the  government  revenues;  the  greater  facility  of 
obtaining  loans,  and  the  receipt  of  interest  by  the  Gov- 
ernment on  its  deposits.     The  first  of  these  arguments,  as 


Independent   Treasury  of  the   United   States 

to  the  safer  keeping  and  transmission  of  the  government 
money,  is  patently  weak.  As  Mr.  Niles  had  remarked 
years  before,  a  Government  is  not  worthy  of  its  name  if  it 
can  not  protect  its  own  property.  And  if  it  can  not  pro- 
tect its  own  property,  how  could  any  bank  do  so  when  the 
Government  is  the  ultimate  source  of  protection  to  the 
bank  ?  The  only  strength  of  the  argument  lies  in  the  fact 
that  if  a  bank  should  lose  government  deposits  it  would 
have  to  replace  them  if  it  could,  if  it  had  any  means  left 
wherewith  to  do  so.  The  matter  of  interest  is  unimpor- 
tant, and  should  have  no  weight  by  the  side  of  other  con- 
siderations. A  far  more  weighty  objection  to  the  system 
under  discussion  was  brought  forward  when  it  was  said 
that  the  continued  payment  of  government  debts  in  coin 
was  impracticable.  The  use  of  treasury  notes,  it  was 
said,  would  become  necessary,  and  they  would  remain  at 
par  only  so  long  as  public  deposits  were  on  hand.  The 
argument  had  some  truth  in  it,  but  it  was  not  true  to  the 
extent  its  advocates  maintained.  Aside  from  political 
exigencies,  under  a  sound  system  of  finance,  payments  in 
actual  specie  are  only  inconvenient  and  costly,  not  im- 
practicable, in  some  varying  proportion  to  their  amount 
and  frequency. 

In  a  review  of  the  subject  the  editor  of  the  Bankers' 
Magazine  asserted:  "That  scheme  [the  sub  treasury]  we 
consider  utterly  impracticable  and  indefensible."  Such 
a  law  "can  not  be  in  force  for  six  consecutive  months, 
nor  will  it  be,  in  our  opinion,  strictly  complied  with  for 
forty-eight  hours." 

« 1: 15  (1845-46). 
41969° — 10 4  49 


National     Monetary     Commission 

The  subject  went  the  old  weary  round  of  discussion  in 
Congress,  supported  and  attacked  with  arguments  that 
apphed  and  arguments  that  did  not,  with  arguments  to 
the  point  and  arguments  aside  from  the  point,  and 
emerged  at  last  into  light  from  behind  the  clouds  of  per- 
sonalities, party  animosities,  and  "counsel  without 
knowledge,"  that  more  or  less  darkened  the  subject  during 
the  whole  ten  years  from  the  time  when  it  had  been  first 
proposed. 

As  before,  the  hottest  fight  was  made  over  the  provision 
requiring  receivers  and  disbursers  of  the  public  money, 
including  all  postmasters,  to  receive  and  pay  out  specie 
only.  On  the  face  of  it,  this  was,  of  course,  the  most 
probably  impracticable  provision  of  the  bill.  Objection 
was  also  made  to  the  employment  of  so  large  a  portion  of 
specie  in  the  payment  of  duties,  on  the  ground  that  it 
would  embarrass  business;  and  the  expensiveness  of  the 
system  was  held  up  as  a  further  reason  for  condemnation. 

However,  the  tide  had  turned,  and  the  ship  of  state  was 
being  guided  by  the  political  compeers  and  descendants 
of  Jackson  and  his  policy,  and  public  opinion  was  less 
pronounced  against  the  measure  than  it  had  been.  Thus 
it  happened  that  the  sub  treasury  was  reestablished. 
The  bill  was  reported  by  the  Committee  of  Ways  and 
Means,  and  passed  the  House,  April  2,  1846,  by  a  vote  of 
123  to  67.  It  received  the  sanction  of  the  Senate,  on  the 
ist  of  August,  by  a  strict  party  vote  of  28  to  24,  and  went 
into  effect  immediately,  thus  consummating  the  policy 
of  the  "divorce  of  bank  and  State"  which  was  begun  by 
Jackson  and  carried  on  by  Van  Buren,  and  in  his  time 


Independent   Treasury  of  the   United   States 

lasted  "just  long  enough  to  prostrate  the  party  which 
brought  it  into  being;  which  expired  with  the  elevation 
of  the  opposing  party,  was  revived  with  the  restoration 
of  'the  democracy,'  and  has  since  continued,  through 
changes  of  administration,  undisturbed;  having  received 
the  general  acquiescence  of  the  popular  will,  if  not  the 
positive  approval  of  the  public  judgment. "« 

And  so  the  divorce  of  bank  and  State,  which  had  for  a 
time  been  "a  mensa  et  thoro,''  now  became  "a  vinculo.'' 
The  act  found  its  justification  in  the  nature  and  condition 
of  the  banking  system  of  the  time,  which  made  the 
reliance  of  the  Government  on  the  banks  for  financial 
safety  dangerous  and,  therefore,  undesirable.  Under  the 
old  national  banks  the  issue  of  notes  was,  indeed,  fairly 
well  under  government  control.  But  that  system  of 
issue  was  unsuited  to  the  rapidly  growing  needs  of  the 
country,  and  threatened  a  social  differentiation  incom- 
patible with  the  preservation  of  the  democratic  equality 
necessary  to  the  vitality  of  republican  government.* 
The  State  banking  system  had  been  well  denominated 
"wild-cat."  Utterly  irresponsible,  and  beyond  control 
in  the  strength  of  the  doctrine  of  state  supremacy,  in-  its 
evil  and  untenable  form  which  was  swept  away  by  the 
necessities  of  the  Government  in  the  civil  war,  these 
banks  were  a  veritable  powder  magazine  by  the  explosion 
of  which  the  credit  and  good  name  of  the  nation,  if  it 
trusted  them,  might  at  any  time  be  shattered. 

It  is  in  this  danger  that  we  must  look  for  the  justification 
of  the  removal  of  the  government  finances  to  a  sounder 

o  Young,  A.  W.:  American  Statesman,  739. 

b  Cf.  Schurz,  Carl:  Henry  Clay  (American  Statesmen  Series),  II:  48-50. 

51 


National    Monetary     Commission 

and  safer  basis.  Whatever  may  be  the  influence  of  its 
operation  now,  the  establishment  of  the  sub  treasury  was, 
under  the  circumstances,  justifiable  and  necessary. 
Whether  its  continuance  is  so,  is  another  question,  the 
answer  to  which  it  remains  to  discover  from  the  history 
of  its  operation. 


52 


Chapter    III. — DeveivOpment    of    the    Independent 

Treasury. 

the  provisions  of  the  law. 

The  first  section  of  the  new  law"  defined  the  Treasury 
thus: 

"  The  rooms  prepared  and  provided  in  the  new  Treasury 
building,  at  the  seat  of  government,  for  the  use  of  the 
Treasurer  of  the  United  States,  his  assistants  and  clerks, 
and  occupied  by  them,  and  also  the  fireproof  vaults  and 
safes  erected  in  said  rooms  for  the  keeping  of  said  moneys 
in  the  possession  and  under  the  immediate  control  of 
said  Treasurer,  and  such  other  apartments  as  are  pro- 
vided for  in  this  act  as  places  of  deposit  of  the  public 
money,  are  hereby  constituted  and  declared  to  be  the 
Treasury  of  the  United  States."  The  other  places  of 
deposit  provided  for  were  Philadelphia,  New  Orleans,  New 
York,  Boston,  Charleston,  and  St.  Louis.  The  appoint- 
ment of  assistant  treasurers  was  provided  for  in  the  last 
four  places,  while  in  the  other  two  the  treasurers  of  the 
mints  were  to  perform  the  duties  of  assistant  treasurers. 

The  sixth  section  contains  the  provisions  which  essen- 
tially modified  the  nature  of  the  Treasury.  It  provides 
"That  the  Treasurer  of  the  United  States,  the  treasurer 
of  the  mint  of  the  United  States,  the  treasurers,  and  those 
acting  as  such,  of  the  various  branch  mints,  all  collectors 
of  the  customs,  all  surveyors  of  the  customs  acting  also 
as  collectors,  all  assistant  treasurers,  all  receivers  of  public 

"The  act  is  given  in  full  in  Appendix  2. 
53 


National    Monetary     Commission 

moneys  at  the  several  land  offices,  all  postmasters,  and  all 
public  officers  of  whatsoever  character  be,  and  they  are 
hereby,  required  to  keep  safely,  without  loaning,  using, 
depositing  in  banks,  or  exchanging  for  other  funds  than 
as  allowed  by  this  act,  all  the  public  money  collected  by 
them,  or  otherwise  at  any  time  placed  in  their  possession 
and  custody,  until  the  same  is  ordered,  by  the  proper 
department  or  officer  of  the  Government,  to  be  trans- 
ferred or  paid  out;  and  when  such  orders  for  transfer  or 
payment  are  received,  faithfully  and  promptly  to  make 
the  same  as  directed,  and  to  do  and  perform  all  other 
duties  as  fiscal  agents  of  the  Government,  which  may  be 
imposed  by  this  or  any  other  acts  of  Congress,  or  by  any 
regulation  of  the  Treasury  Department  made  in  conformity 
to  law;  and  also  to  do  and  perform  all  acts  and  duties 
required  by  law,  or  by  direction  of  any  of  the  executive 
departments  of  the  Government,  as  agents  for  paying 
pensions,  or  for  making  any  other  disbursements  which 
either  of  the  heads  of  those  departments  may  be  required 
by  law  to  make,  and  which  are  of  a  character  to  be  made 
by  the  depositaries  hereby  constituted  consistently  with 
the  official  duties  imposed  on  them." 

Sections  7  and  8  provide  for  the  giving  of  bonds;  sec- 
tion 9  provides  for  deposits  by  collectors;  section  10,  for 
transfers  by  the  Secretary  of  the  Treasury;  sections  11 
and  12,  for  examinations  of  the  condition  of  the  sub- 
treasuries  and  depositaries;  section  13  provides  means, 
such  as  fireproof  vaults,  etc.,  for  the  safe-keeping  of  the 
public  funds;  section  14,  for  the  transfer  of  balances  from 
one  depositary  to  another  by  the  Secretary  of  the  Treasury ; 
section   15  directs  the  method   of  deposit  by  marshals, 

54 


Independent   Treasury  of  the   United   States 

district  attorneys,  etc.;  section  i6  defines  and  provides 
penalties  for  embezzlement,  and  for  violations  of  the  act; 
and  section  17,  for  temporary  quarters.  Sections  18  and 
19  contain  the  provisions  around  which  debate  had  raged 
most  fiercely.  In  them  occurs  the  famous  specie  clause, 
which  requires  the  payment  of  public  dues  and  disburse- 
ments in  gold  or  silver  coin  or  Treasury  notes  only.  The 
specie  clause  was  not  to  go  into  effect  until  the  ist  of 
January,  1847.  Section  20  supplements  the  two  previous 
sections  by  requiring  that  all  exchanges  of  funds  must  be 
on  a  gold  and  silver  basis.  The  mode  of  payment  of  drafts 
is  prescribed  by  the  twenty-first  section  and  that  of 
salaries  by  the  twenty-second.  In  the  twenty-third  and 
final  section  provision  is  made  for  immediate  incidental 
expenses. 

From  this  brief  summary  it  is  clear  that  the  act  com- 
pletely accomplished  the  separation  of  bank  and  state. 
It  made  the  Government  its  own  banker,  even  to  the 
furnishing  of  the  paraphernalia  of  office  rooms;  and, 
taken  in  connection  with  the  law  sanctioning  the  emis- 
sion of  Treasury  notes,  the  subtreasury  act  virtually 
made  the  Treasury  a  bank  of  issue. 

The  provision  of  vaults  was  simply  a  result  of  that 
play  on  words  which,  after  all,  was  part  of  the  basis 
of  the  constitutional  argument.  There  was  no  good 
reason  why,  even  though  the  government  financial  oper- 
ations were  separated  from  the  banks,  the  public  money 
might  not  have  been  kept  in  bank  vaults  as  special 
deposits. 

The  places  selected  for  the  establishment  of  sub- 
treasuries  were  those  in  which  the  government  operations 

55 


National    Monetary     C  ommis  s  io 


n 


were  most  considerable,  and  which  were  centers  for  the 
collection  of  revenue  from  the  country  round  about  and 
for  the  payment  of  public  creditors.  The  establishment 
of  a  subtreasury  or  depositary  appears  to  have  been 
regarded  as  advantageous  to  a  locality  from  a  business 
point  of  view,  because  it  was  thought  to  make  trade 
brisker  through  the  concentration  of  larger  amounts  of 
money.  The  selection  of  the  localities  was  made,  how- 
ever, on  the  supposed  needs  of  the  public  service;  and, 
as  a  matter  of  fact,  the  ground  covered  by  the  new  sub- 
treasuries  and  depositaries  was  substantially  that  for- 
merly occupied  by  the  banks  through  which  the  Govern- 
ment had  done  its  business.  At  a  later  time  the  feeling 
that  the  presence  of  a  subtreasury  is  advantageous  to 
business  led  to  an  attempt  to  secure  the  establishment 
of  one  at  L-ouisville,  but  the  request  was  refused  by 
Congress.** 

The  requirement  that  all  public  officers  should  safely 
keep  the  public  money  committed  to  their  charge  without 
depositing  it  in  banks  was  as  absurd  as  it  was  unjust  to 
the  officers  and  unsafe  for  the  money.  For  no  proper 
places  for  safe-keeping  were  provided.  The  banks  had 
vaults  far  safer  than  any  place  of  deposit  that  could  be 
provided  by  most  of  the  officers  of  the  Government. 
The  new  provision,  then,  made  the  public  money  less, 
rather  than  more,  safe,  so  far  as  fire  and  theft  were  con- 
cerned. Moreover,  it  was  unjust  to  throw  so  great  a 
responsibility  on  the  holders  of  the  pubUc  money  with- 
out furnishing  them  suitable  accommodations  for  keep- 
ing it.     To  be  sure  section   13  did  provide  for   fireproof 


o  See  p.  80. 
56 


Independent   Treasury  of  the   United   States 

vaults,  and  section  17  for  temporary  quarters,  but  not  in 
sufficient  number;  and,  besides,  they  could  not  be  secured 
for  some  time  to  come.  The  specie  clause  was  a  return 
to  the  provision  passed  by  the  First  Congress,  that  the 
Treasury  should  receive  only  coin  in  payment  of  public 
dues.  Of  this  clause  Edward  Everett  said  that  "if  the 
attempt  could  be  forced  through,  it  would  be  like  an 
attempt  on  the  part  of  the  Government  to  make  use  of 
the  ancient  modes  of  travel  and  conveyance,  while  every 
citizen  in  his  private  affairs  enjoyed  the  benefits  of  steam 
navigation  and  railways."  "  In  a  certain  sense  Everett 
was  right ;  but  the  remark  seems  to  indicate  that  he  mis- 
conceived the  whole  drift  of  the  subtreasury  act,  and 
especially  of  the  specie  clause.  As  Secretary  Walker 
had  pointed  out,  the  act  without  the  specie  clause  would 
have  been  useless  or  worse.  If  the  Government  were  to 
be  no  longer  connected  with  banks,  especially  in  the 
way  of  having  no  control  over  their  issues,  it  was  right 
that  it  should  not  use  their  notes.  The  only  other  way 
whereby  it  could  provide  itself  with  the  "  steam  naviga- 
tion and  railways"  of  paper  money,  or  the  "aerial  wagon 
way,"  to  use  Adam  Smith's  better  figure,  was  to  issue 
notes  of  its  own.  Every  lover  of  sound  finance  must 
always  fear  that  operation,  which,  under  the  circimi- 
stances  existing  at  that  time  would  have  caused  untold 
trouble  if  it  had  been  largely  resorted  to.  The  only 
alternative  was  the  use  of  specie,  and  to  that,  in  the  main, 
the  Government  wisely  committed  itself.  The  clause 
was  not,  indeed,  could  not  be,  observed  to  the  very 
letter.     Even  as  late  as  1855  we  are  told  it  was  little,  if 

o  Bankers'  Magazine,  August,  1885. 
57 


National    Monetary     Commission 

at  all,  observed  by  postmasters."  Notwithstanding  the 
imperfect  manner  in  which  the  law  was  executed,  the 
clause  was  productive  of  great  good.  "  All  receipts  from 
lands,  customs,  and  other  public  dues  were  paid  in  gold 
and  silver  and  treasury  notes;  and  these  were  employed 
by  the  Treasurer  in  making  payments.  In  this  way  a 
stream  of  gold  and  silver  was  set  in  motion,  hmited,  indeed, 
and  running  chiefly  from  the  public  depositaries  to  the 
banks  and  then  returning.  But  it  swelled  to  larger 
dimensions."  ^  In  short,  the  specie  clause,  although  it 
was  impeded  and  limited  in  its  operation,  was  wholly 
productive  of  good,  and  the  departure  from  it  imder  finan- 
cial stress  in  later  times  was  a  misfortime. 

So  far  as  the  banks  were  concerned  the  new  system 
meant  the  loss  of  the  government  deposits,  with  the  con- 
sequence of  lessened  discounts  and  the  withdrawal  of  the 
support  of  government  credit  from  their  notes.  The 
banks  might  suffer  from  the  first  incident,  but  had  no 
right  to  complain  of  it;  and  as  for  the  second,  it  was  no 
fault  of  the  Government  if  bank  notes  could  not  be  kept 
afloat  at  par  without  government  support.  It  is  the 
duty  of  a  bank  to  see  that  its  notes  are  convertible  at 
par  without  the  aid  of  the  pubHc  credit. 

The  work  which  the  new  system  had  to  accomplish 
seemed  simple  enough,  consisting  as  it  did  merely  of  the 
receipt  and  payment  of  the  public  money.  It  seemed 
that  the  organization  of  such  a  system  should  not  be  any 
more  difficult  than  that  of  such  a  group  of  branches  as 
was  developed  under  the  Second  United  States  Bank. 

a  Young,  A.  W.:  American  Statesman,  847. 

6  Bolles,  A.  S.:  Financial  History  of  the  United  States,  1789-1860,  356. 

58 


Independent   Treasury  of  the   United   States 

But  having  declared  its  purpose  to  pay  specie,  the  Govern- 
ment was  bound  to  do  so  at  every  agency,  however 
remote  from  a  great  business  center.  To  refuse  to  do  so, 
or  even  to  hesitate  or  delay,  was  to  discredit  itself. 

The  new  system  began  its  career  under  many  difficul- 
ties. No  appropriation  was  made  for  the  salaries  of 
assistant  treasurers,  or  for  additional  salaries  for  treas- 
urers of  the  mint  who  were  to  assume  new  duties  under 
the  law,  or  for  the  payment  of  any  special  examining 
agents.  Neither  were  any  appropriations  made  for  the 
expense  of  transfers,  nor  "to  enable  disbursing  agents  to 
pay  the  public  creditors  at  all  times  and  places  with 
punctuality  and  despatch."  Moreover,  the  provision  for 
incidental  expenses  was  inadequate;  no  adequate  se- 
curity was  provided  by  the  law  for  public  money  in  the 
hands  of  disbursing  agents,  and  the  powers  of  the  depart- 
ment as  to  the  method  of  making  payments  abroad  were 
not  sufficiently  defined.  There  were,  in  addition,  certain 
external  difficulties  to  be  overcome.  Chief  among  these 
were  the  opposition  of  the  banks  and  the  distrust  and 
friction  incident  to  an  untried  system. 

On  the  25th  of  August,  1846,  Secretary  Walker  issued 
a  circular  to  collectors,  subtreasurers,  and  other  officers, 
directing  them  to  make  all  government  drafts  payable  to 
order,  not  bearer.  The  drafts  were  to  be  transferable 
only  by  special  indorsement,  and  payable  only  at  desig- 
nated places.  If  a  draft  were  payable  at  a  place  not  more 
than  50  miles  from  Washington,  it  must  be  presented  for 
payment  within  twenty  days  from  the  date  of  the  draft; 
if  at  a  point  distant  between  50  and  100  miles,  it  must 
be  presented  within  forty  days;  between   100  and   200 

59 


National     Monetary     Commission, 

miles,  within  sixty  days;  between  200  and  400  miles, 
within  eighty  days;  and  over  400  miles,  within  ninety 
days.  All  drafts  not  so  presented  had  to  be  sent  to  the 
Treasurer  to  be  paid  as  he  should  direct.  No  exchange 
of  funds  between  disbursing  officers  or  other  government 
agents  was  allowed,  except  for  gold  or  silver.  Because 
of  the  specie  clause,  the  Secretary  directed  that  no  pay- 
ments be  made  in  treasury  drafts,  even  though  a  creditor 
should  prefer  that  mode  of  payment." 

THE   INDEPENDENT   TREASURY   DURING   THE   MEXICAN 

WAR. 

During  the  next  two  years  the  country  had  the  Mexi- 
can war  on  its  hands,  and  in  1847  the  Government  was 
compelled  to  issue  over  $20,000,000  of  treasury  notes, 
and  to  contract  a  $28,000,000  loan.''  But  the  notes  were 
issued  at  par,  and  the  bonds  commanded  a  premium. 
Throughout  the  war  specie  payments  were  kept  up,  and 
the  treasury  notes  at  no  time  fell  more  than  one-half  of 
I  per  cent  below  par  in  New  York.  In  his  report  the 
Secretary  gives  the  subtreasury  much  of  the  credit  for 
the  success  of  the  financial  operations  of  the  war.  "The 
Constitutional  Treasury,"  he  says,  "  has  been  tried  during 
a  period  of  war,  when  it  was  necessary  to  negotiate  very 
large  loans,  when  our  expenditures  were  being  increased 
and  when  transfers  unprecedented  in  amount  were 
required  to  distant  points  for  disbursement.  During  the 
last  eleven  months  the  Government  has  received,  trans- 
ferred, and  disbursed  more  specie  than  during  the  whole 

"Finance  Report,  1846,  Appendix  H. 

b  Including  the  conversion  of  treasury  notes. 

60 


Independent   Treasury  of  the    United   States 

aggregate  period  of  fifty-seven  years  preceding  since  the 
adoption  of  the  Constitution."  Over  $24,000,000  of 
specie  were  imported  during  the  year,  a  net  gain  of  more 
than  $22,000,000  of  imports.  This  specie,  the  Secretary 
maintained,  would  have  been  made  the  basis  of  a  paper 
inflation  that  would  have  produced  a  ruinous  revulsion 
in  business  if  it  had  been  deposited  in  the  banks.  Gouge, 
writing  at  the  time,  took  the  same  view.  The  Secretary 
wrote :  ' '  From  this  revulsion  we  have  been  saved  by  the 
Constitutional  Treasury,  by  which  the  specie  imported, 
instead  of  being  converted  into  bank  issues,  has  been 
made  to  circulate  directly,  to  a  great  extent,  as  a  cur- 
rency among  the  people.  *  *  *  Xhe  Government  is 
now  disconnected  from  banks,  and  yet  its  stock  and  notes 
are  at  par,  although  we  have  been  constrained  to  con- 
tract heavy  loans,  and  to  keep  larger  armies  in  the  field 
than  at  any  former  period.  But  during  the  last  war, 
when  the  Government  was  connected  with  banks,  its  6 
per  cent  stock  and  treasury  notes  were  depreciated  25 
per  cent,  payable  in  bank  paper  20  per  cent  below  par, 
thus  amounting  to  a  loss  of  45  cents  upon  every  dollar  in 
the  operations  of  the  Government." 

Although  Secretary  Walker's  view  of  the  beneficial 
influence  of  the  independent  treasury  may  be  regarded  as 
too  favorable,  we  may  readily  admit  that  the  credit  of  the 
Government  was  upheld  largely  by  the  specie  clause  of  the 
law,  which  virtually  bound  it  to  redeem  its  notes  and  bonds 
in  coin,  and  that  the  operation  of  the  act  was  to  keep  up  a 
specie  circulation  which  gave  a  sound  basis  to  the  whole 
currency. 


61 


National     Monetary     Commission 

How  far  these  results  would  have  been  accomplished — 
and  how  far,  therefore,  they  were  due  to  the  subtreasury — 
if,  while  the  Government  was  under  the  stress  of  the  war, 
trade  had  not  assumed  a  tremendous  bound,  is  at  least 
problematical.  The  large  grain  exports  of  1847,  amount- 
ing to  over  $37,000,000,  brought  in,  as  already  noted,  a 
large  amount  of  specie;  the  abolition  of  the  corn  laws  in 
England  was  attaining  its  full  effect,  and  the  revolutionary 
disturbances  in  Europe  in  1848  also  tended  to  help  Ameri- 
can commerce.  The  balance  of  trade  was  settled  largely 
by  imports  of  specie  which  remained  in  the  country,  thus 
showing  that  it  was  satisfying  a  lasting  need.  The  per- 
manence of  demand  was  doubtless  largely  caused  by  the 
demand  of  the  Government.  If  the  conditions  of  business 
had  not  been  favorable  to  securing  specie,  however,  very 
likely  the  stress  produced  by  the  demand  of  the  Govern- 
ment for  it,  would  have  strained  the  financial  virtue  of 
Congress  to  the  point  of  breaking  or  annulling  the  act. 
Consequently  the  subtreasury  can  not  be  credited  with  the 
whole  of  the  good  influence  of  the  increase  in  metallic  circu- 
lation. The  increase  was  largely  due  to  favorable  commer- 
cial and  financial  conditions.  Still  the  independent  action 
of  the  Government  had  a  beneficial  influence  on  the  cur- 
rency by  restraining  bank  issues.  If  the  government 
money  had  been  deposited  in  the  banks,  as  the  banks 
were  then  conducted,  they  would  have  made  it  the  basis 
of  further  issues  of  notes,  forcing  up  prices  and  leading  to 
an  export  of  specie.  But  it  is  not  surprising  that  the 
contrast  between  government  finances  and  credit,  in  the 
wars  of  181 2  and  of  1846,  should  have  reconciled  the  peo- 
ple to  the  new  system. 

62 


Independent   Treasury  of  the    United   States 

One  small  advantage  of  the  system  that  had  not  been 
foreseen  was  reported  by  Secretary  Walker.  This  was  in 
the  fact  that,  whereas  under  the  regime  of  the  banks  it  had 
been  necessary  to  keep  $4,000,000  in  the  treasury  to  supply 
the  mints  with  bullion  for  coinage,  it  was  found  under  the 
subtreasury  system  that  $3,000,000  would  do. 

The  experience  of  the  first  two  years  developed  some 
defects  of  detail  in  the  system.  In  his  report  for  1 848,  Sec- 
retary Walker  writes  of  losses  from  delay  in  shipping  foreign 
coin  received  in  New  York  for  customs  dues  to  Philadel- 
phia for  recoinage.  Therefore  he  advocated  the  establish- 
ment of  a  branch  mint  at  New  York.  He  still  insisted, 
however,  on  the  advantages  of  the  independence  of  the 
Government  in  money  matters,  asserting  that  "a  system 
which  has  operated  so  beneficially,  both  in  war  and  in 
peace,  must,  in  the  main,  be  wise  and  salutary.  " 

A  side  light  is  thrown  on  the  working  of  the  subtreasury 
system  in  a  speech  of  Webster's,  delivered  in  Faneuil 
Hall,  Boston,  October  24,  1848.*^  He  asserted  that  on  the 
25th  of  the  preceding  August,  the  New  York  banks  had 
$5,800,000  in  specie,  and  the  New  York  subtreasury  had 
$1,400,000.  On  September  29,  the  banks  had  but 
$4,600,000  and  the  subtreasury  had  $2,400,000,  thus  hav- 
ing absorbed  $1,000,000  in  a  single  month,  with  the  evil 
results  of  a  scarcity  of  money  and  a  curtailment  of  dis- 
counts. It  must  be  remembered,  however,  that  Webster 
was  making  a  political  speech.  It  is  not  at  all  probable 
that  the  specie  lost  by  the  banks  was  all  gained  by  the 
subtreasury.  Money  was  moving  westward  at  that  season 
of  the  year. 

o  Writings  and  speeches  of  Daniel  Webster  (National  Edition)  IV:  154. 

63 


National    Monetary     Commission 

DEFECTS  SHOWN  IN  EARLY  YEARS  OF  OPERATION. 

In  the  following  year  (1849)  other  inconveniences 
became  manifest.  According  to  the  provisions  of  the  law, 
when  a  draft  was  issued  to  a  disbursing  officer  he  was 
obliged  to  receive  the  whole  amount  of  the  payment,  no 
matter  how  large,  in  one  sum,  even  though  he  was  to  use 
it  in  making  many  separate  small  payments.  Hence 
these  officers  were  compelled  to  assume  custody  of  the 
money  and  bear  the  burden  of  transferring  it  to  the  places 
where  it  was  due.  In  this  way  the  money  was  exposed 
to  risk  of  loss  or  theft.  Moreover,  the  actual  carriage  of 
coin  was  expensive  and  unsafe;  there  was  great  incon- 
venience from  the  accumulation  of  coin  where  it  was  not 
needed,  and  the  number  of  clerks  employed  to  do  the 
work  of  the  various  offices  was  too  small.  On  account  of 
these  disadvantages,  as  he  affirmed,  the  new  Secretary  of 
the  Treasury,  Mr.  Meredith,  questioned  the  expediency  of 
continuing  the  system.  He  proposed  that  disbursing 
officers  be  allowed  to  deposit  their  drafts  with  an  assistant 
treasurer  and  draw  on  the  deposit  as  they  needed  the 
money.  But,  although  the  matter  had  been  repeatedly 
urged  on  its  attention,  nothing  was  done  by  Congress  even 
with  reference  to  disbursing  agents  until  1857. 

As  to  the  transfer  of  the  public  funds,  obviously  one 
way  was  to  transfer  specie  by  agents  appointed  for  the 
purpose.  But  this  could  be  done  only  at  great  expense 
and  risk  and  loss  of  time.  A  second  method  of  transfer 
was  to  give  drafts  to  bankers  and  brokers  and  permit 
them  to  use  the  money  long  enough  to  compensate  them 
for  the  expense  of  transporting  the  specie.     This  method 

64 


Independent   Treasury  of  the   United   States 

had  been  used  early  in  subtreasury  history  and  became 
common  after  1850. 

When  Secretary  Guthrie  assumed  office  in  1853,  he  found 
that  "$475,000  was  in  the  hands  of  agents  under  agree- 
ments to  transfer  the  same  for  the  department  to  different 
places  of  deposit,  together  with  the  sum  of  $2,226,982.27 
unaccounted  for  and  designed  to  pay  interest."'*  The 
Secretary  abolished  this  method  of  making  transfers  and 
efifected  them  "by  the  sale  of  treasury  drafts  at  the  points 
where  the  money  was  needed  for  disbursements,  as  author- 
ized by  law,  or  by  an  actual  transfer  by  an  officer  of  the 
department."^  Secretary  Guthrie  required  the  assistant 
treasurers  and  officers  of  depositaries  to  receive  the  deposits 
of  disbursing  agents,  so  as  to  render  the  use  of  banks 
by  these  agents  unnecessary.  But  not  all  collecting 
officers  adopted  the  practice,  and  the  Treasury  continued 
to  draw  on  them  directly.  It  was  well  that  the  Secretary 
held  this  opinion  of  the  proper  method  of  making  trans- 
fers, for  the  use  of  bankers  and  brokers  as  agents  was  a 
vicious  makeshift.  It  opened  the  way  widely  to  favorit- 
ism toward  particular  banks  and  was  a  source  of  great 
risk.  Some  of  the  drafts  were  not  accounted  for  for  long 
periods.  Moreover,  it  was  a  virtual  abandonment  of  the 
principle  of  the  complete  separation  from  banks,  which 
was  the  underlying  principle  of  the  Independent  Treasury. 
That  this  mode  of  transferring  funds  was  much  abused  is 
shown  by  the  increase  in  the  amount  of  transfers  when 
the  method  was  used.  When  the  transfers  were  made  in 
cash,  they  amounted,  in  New  Orleans,  to  about  $38,000  a 

o Finance  Report,  1853: 13  bibid. 

41969°— lo 5  65 


National    Monetary     Commission 

month;  under  the  system  of  employing  bankers  and 
brokers  the  transfers  swelled  to  $227,000.  In  Washington 
they  rose  from  $135,000  a  month  to  $225,000."  The  evil 
was  corrected,  however,  in  1854,  and  the  transfers  were 
thereafter  made  in  money. 

In  May,  1854,  Mr.  William  M.  Gouge  was  appointed 
special  agent  to  examine  the  condition  of  the  various  sub- 
treasuries  and  their  operations.  As  has  been  already 
mentioned,  the  system,  at  the  time  of  its  establishment, 
was  under  great  disadvantages  from  lack  of  proper  build- 
ings. In  only  a  few  of  the  places  designated  as  the  seats 
of  depositaries  were  such  to  be  found.  Gouge  reported* 
that  the  Government  had  not  "in  the  whole  valley  of  the 
Ohio  a  building  or  a  vault  in  which  to  deposit  a  dollar  or 
a  paper."  Boston  was  the  only  place  provided  with  suit- 
able buildings  for  the  subtreasury.  Most  of  the  buildings 
actually  used  for  the  purpose  were  unsuitable,'^  being  only 
such  as  each  agent  could  secure  under  his  special  circum- 
stances; so  that,  as  hitherto,  the  provisions  for  the  safe- 
keeping of  the  public  money  against  fire  and  burglars 
were  totally  inadequate.  But  the  zeal  and  honesty  of  the 
officials  made  up  for  these  defects,  showing,  as  the  Secre- 
tary pointed  out,  that  the  objection  to  this  system, 
founded  on  probable  loss  from  the  personal  dishonesty  of 
the  assistant  treasurers,  was  unfounded. 

Gouge  recommended  that  the  transfers  of  specie  be 
reduced  to  a  minimum  and  supplemented  by  the  use  of 
drafts  on  some  specified  subtreasury.     These  drafts,  he 

"Gouge's  Report.     In  Finance  Report,  1854,  Doc.  No.  30. 
h  Ibid. 

c  For  an  interesting  description  of  a  United  States  depositary  in  a  tavern, 
see  Finance  Report,  1854:257. 

66 


Independent   Treasury  of  the   United   States 

recommended,  should  be  issued  at  any  subtreasury  on 
deposit  of  the  amount  in  specie  at  the  issuing  office.  This 
mode  of  transfer  was  essentially  adopted  afterwards. 
The  object  of  making  these  proposed  drafts  payable  at  a 
particular  depositary  was  to  prevent  their  passing  from 
hand  to  hand  as  currency.  For  with  the  restriction  as  to 
the  place  of  redemption,  if  they  circulated  at  all  it  would 
be  in  the  neighborhood  of  the  subtreasury  at  which  they 
were  payable. 

Gouge  incorporated  in  his  report  a  resume  of  the  advan- 
tages of  the  independent  treasury  as  he  saw  them.  He 
insisted  that  it  gave  greater  stability  to  the  banks,  not 
only  by  its  restrictive  influence  on  note  issues,  but  also  by 
keeping  specie  in  circulation.  For  the  banks  are  sus- 
tained, he  argued,  not  only  by  the  specie  which  they  have 
in  their  vaults,  but  also  by  all  in  the  country  to  which  they 
may  have  immediate  access  by  the  sale  of  securities. 
Gouge  further  maintained  that  the  amount  of  specie  in 
the  country  had  been  more  than  doubled  by  the  action  of 
the  constitutional  treasury  system.  Summarizing  his 
opinions,  he  declared  that  if  the  constitutional  treasury 
system  were  faithfully  carried  out  it  would  increase  the 
amount  of  gold  and  silver  in  circulation,  weaken  the  force 
of  bank  expansions  and  contractions,  prevent  the  losses 
that  had  formerly  arisen  from  the  use  by  public  officers  of 
pubHc  funds  intrusted  to  their  care,  give  the  Government 
at  all  times  complete  control  of  its  own  funds,  prevent  the 
derangement  of  business  caused  by  Government's  efi"ecting 
large  loans  through  bank  credits,  and  tend  to  prevent  a 
general  suspension  of  specie  payments,  or  facilitate  their 
restoration  if  suspension  should  occur.     "The  less  Gov- 

67 


National    Monetary     Commission 

ernment  has  to  do  with  banks,  and  the  less  banks  have  to 
do  with  Government,  the  better  for  both."  That  doctrine 
was  eminently  sound  as  banks  were  then  constituted. 

It  may  fairly  be  admitted  that  experience  with  the 
independent  treasury,  up  to  the  time  when  Gouge  wrote, 
justified  him  in  the  first  four  opinions  mentioned  in  the 
summary  above,  gave  plausibility  to  the  fifth,  and  showed 
that  there  was  a  considerable  amount  of  truth  in  the  last. 
For,  notwithstanding  its  many  imperfections,  the  system 
seems  to  have  been  at  this  time  in  good  working  order, 
and  was  apparently  accomplishing  all  that  its  advocates 
had  claimed  for  it.  But  since  its  establishment  the 
financial  operations  of  the  Government  and  the  conditions 
of  business  had  been  favorable  to  its  success.  At  no  time 
had  there  been  in  the  Treasury  any  very  large  surplus,  and 
there  had  been  no  crisis  to  cause  financial  distress.  To  be 
sure  the  Mexican  war  had  caused  a  pressure  in  the  market, 
but  there  was  no  real  disturbance.  On  the  whole,  business 
had  been  good  and  commerce  had  increased.  Consequently 
there  was  little  to  cause  friction  in  the  working  of  the  new 
fiscal  machinery. 

These  conditions  made  it  possible  for  the  vSecretary  of 
the  Treasury  to  write,  in  1855,  that  the  independent 
treasury  was  "still  eminently  successful"  in  all  its  opera- 
tions. The  transfers  for  disbursement  for  the  fiscal  year 
were  $39,407,674,  made  at  a  cost  of  $19,762,  and  the 
premiums  on  the  sale  of  Treasury  drafts  amounted  to 
$30,431.  The  receipts  and  expenditures  of  the  Govern- 
ment for  the  year  were  all  paid  in  gold  and  silver,  and 
according  to  the  Secretary  were  without  any  perceptible 
effect  on  currency  or  business. 

68 


Independent   Treasury  of  the    United   States 

During  the  year  1854-55  the  vaults  at  Washington  had 
been  made  safe,  but  those  at  other  places  remained  in 
pretty  much  the  same  condition.  Gouge  again  made 
an  examination  of  them,  but  developed  nothing  new. 
The  only  loss  from  robbery,  he  says,  was  in  the  previous 
year  at  Pittsburg,  and  amounted  to  $10,000. 

The  system  of  transfer  drafts  recommended  by  Gouge 
the  year  before  had  been  adopted  and  had  worked  well. 
He  reported  that  further  experience  had  strengthened  his 
opinion  of  the  advantages  of  the  system. 

EARIvY  INFLUENCE  ON  THE  MONEY  MARKET  AND    RENEWAL 
OF    CONNECTION    WITH    BANKS. 

Although  in  its  administration  the  system  was  working 
well,  it  had  already  begun  to  exert  an  influence  on  business 
through  the  money  market,  which  had  attracted  some 
attention.  About  this  time  the  California  gold  mines 
began  to  have  an  influence  on  business  by  making  gold  a 
commodity  for  export.  The  excess  of  gold  exports  over 
imports  rose  from  a  little  less  than  $3,000,000  in  1850  to 
$24,000,000  in  1851,  to  $37,000,000  in  1852,  and  became 
$34,000,000,  $52,000,000,  $41,000,000,  and  $56,000,000, 
respectively,  in  the  four  following  years.  The  large  gold 
production  must  have  had  a  tendency  to  make  prices  more 
irregular  than  they  would  otherwise  have  been.  At  the 
same  time,  the  irregular  action  of  the  subtreasury  was  a 
disturbing  factor.  In  1853  the  receipts  of  the  Government 
exceeded  its  expenditures,  so  that  there  was  a  considerable 
accumulation  of  money  in  the  Treasury.  To  prevent  any 
stringency  that  might  be  caused  thereby  the  Secretary 
issued  a  circular,  on  the  30th  of  July,  offering  to  buy 

69 


National     Monetary    Commission 

$5,000,000  worth  of  6  per  cent  bonds.  He  secured  them 
by  paying  a  premium  of  21  per  cent. 

During  the  year  1854,  according  to  the  report  of  Sec- 
retary Guthrie,  the  Treasury  kept  up  the  demand  for 
coin  by  receiving  and  paying  more  than  $75,000,000  of 
it.  Thus,  the  circulation  of  specie  was  maintained  despite 
the  tendency  exerted  by  the  small  notes  of  the  banks 
to  drive  it  out;  for  so  long  as  the  Government  insisted 
on  using  specie,  it  could  not  be  wholly  driven  from  use. 
The  Treasurer  stated  in  his  report  that  no  difficulty  had 
been  found  in  the  working  of  the  law,  and  that  the  money 
in  the  various  sub  treasuries  was  "as  safe  and  secure  as 
that  in  the  Treasury." 

Nevertheless,  the  existence  of  a  surplus  was  evidently 
a  source  of  anxiety  to  the  wellwishers  of  the  independent 
treasury.  For  in  his  next  report,  December,  1856,  the 
Secretary  of  the  Treasury  took  occasion  to  explain  its 
action  on  the  volume  of  money  and  attempted  to  show 
that  the  influence  was  beneficent.  He  declared  that 
"  the  independent  treasury,  when  over- trading  takes  place, 
gradually  fills  its  vaults,  withdraws  the  deposits,  and, 
pressing  the  banks,  the  merchants,  and  the  dealers,  exer- 
cises that  temperate  and  timely  control  which  serves  to 
secure  the  fortunes  of  individuals  and  preserve  the  general 
prosperity."  Secretary  Guthrie  went  on  to  say  that  the 
subtreasury  may  "exercise  a  fatal  control  over  the  cur- 
rency, the  banks,  and  the  trade  of  the  country,  and  will 
do  so  whenever  the  revenue  shall  greatly  exceed  the 
expenditure."  This  was  clear  to  the  Secretary  from  his 
own  experience  that  year.  There  was  a  surplus  and  prices 
were   rising.     Therefore   the   Treasury   had   repeated   its 

70 


Independent   Treasury  of  the   United   States 

attempt  to  afford  relief  to  the  money  market  by  that 
method  of  forced  debt  payment  with  which  we  have 
since  become  so  familiar.  "There  has  been  expended, 
since  the  4th  of  March,  1853,  more  than  $45,525,000  in 
the  redemption  of  the  public  debt.  This  debt  has  been 
presented,  from  time  to  time,  as  the  money  accumulated 
in  the  National  Treasury  and  caused  stringency  in  the 
money  market.  If  there  had  been  no  public  debt,  and 
no  means  of  disbursing  this  large  sum  and  again  giving 
it  to  the  channels  of  commerce,  the  accumulated  sum 
would  have  acted  fatally  on  the  banks  and  on  trade.  The 
only  remedy  would  have  been  a  reduction  of  the  revenue, 
there  being  no  demand  and  no  reason  for  increased  expen- 
diture."'^ 

The  amount  of  transfers  during  the  year  had  amounted 
to  $38,088,113.92,  at  a  cost  of  $12,945.87;  and  the  premium 
on  the  sale  of  Treasury  drafts  had  been  $54,924.16,  leaving 
$41,978.29  over  the  expenses  of  transfer.  The  Secretary 
expressed  the  opinion  that  hereafter  the  transfers  of 
public  money  would  be  made  without  charge  and  without 
risk. 

By  an  act  of  March  3,  1857,  the  law  was  amended  so 
as  to  require  disbursing  officers  to  deposit  in  some  sub- 
treasury.  Up  to  this  time  many  of  them  had  continued 
to  use  the  banks  for  safe-keeping  of  the  public  money 
in  their  charge,  usually  leaving  it  with  them  as  a  special 
deposit.  After  the  amendment,  the  Secretary  directed 
the  treasurers  of  the  mints,  of  the  depositaries,  and  of 
the  subtreasuries  to  receive  deposits  of  disbursing  officers, 
but  not  to  honor  drafts  on  them  unless  made  in  favor 

a  Finance  Report,  1856:  32. 
71 


National    Monetary     Commission 

of  some  person  known  to  the  treasurer.  If  for  sums 
of  $20  or  less,  the  drafts  might  be  drawn  in  favor  of 
the  disbursing  officer  himself  or  to  bearer.  Disbursing 
officers  might  also  draw  for  money  to  pay  the  salaries 
of  employees,  but  they  were  required  to  furnish  lists 
of  such  employees.  Public  depositaries  were  not  required 
to  pay  drafts  made  out  to  A.  B.,  or  order;  but  they 
might  pay  to  A,  B,,  or  hearer.  There  were  many  obvious 
difficulties  in  the  way  of  the  strict  enforcement  of  the 
amendment,  and  it  is  probable  that  it  was  not  widely 
observed  to  the  letter.  The  Treasury  report  of  1858 
pointed  out,  what  might  have  been  easily  forseen,  that 
there  were  some  conditions  under  which  compliance  with 
the  law  was  impracticable.  Sailors  in  a  foreign  port,,  or 
on  a  long  cruise,  could  not  be  paid  according  to  the  law, 
and  pursers  must  carry  money  with  them.  Indian 
agents  could  not  pay  so,  neither  could  disbursing  officers 
remote  from  a  depositary,  and  disbursing  agents  of  the 
army  would  have  some  difficulty.  Much  additional  labor 
and  expense  were  entailed  by  the  act  requiring  the 
assistant  treasurers  and  depositaries  to  hold  the  money 
of  disbursing  officers  and  pay  it  out  in  detail.  According 
to  Secretary  Cobb,  the  additional  labor  amounted  to  "  100 
per  cent."  This  labor  increased  as  the  government 
revenues  grew,  and  assumed  enormous  proportions  on 
the  breaking  out  of  the  civil  war.  According  to  the  report 
of  1 86 1,  the  amounts  so  deposited  rose  from  $8,000,000 
to  $190,000,000. 

The  year  1857  witnessed  a  panic  in  the  money  market. 
As  the  pinch  grew  more  severe,  the  Secretary  of  the  Treas- 
ury sent  to  the  various  depositaries  silver  change  of  all 

72 


Independent    Treasury  of  the   United   States 

denominations,  and  small  gold  from  the  mint,  with  in- 
structions to  pay  out  the  coin  to  applicants  in  exchange 
for  large  coin.  This  furnishing  of  "  change  "  was  a  real  con- 
venience, and  it  could  not  but  have  had  a  good  educational 
effect  by  keeping  specie  in  daily  use  among  the  people. 

Writing  of  the  effect  of  the  amendment  requiring  dis- 
bursing officers  to  deposit  in  the  government  depositaries, 
Secretary  Cobb  said:  "The  present  condition  of  money 
affairs  is  a  significant  indication  of  the  consequences  that 
must  have  been  anticipated  if  this  regulation  had  not 
been  adopted,  and  the  public  money  advanced  to  disburs- 
ing officers  had  continued  to  be  deposited  in  banks  and 
with  bankers,  and  had  been  used  by  them  as  a  basis  for 
increasing  their  business  and  extending  their  circulation. 
Not  only  would  the  contraction  now  going  on,  and  the 
consequent  embarrassment  and  distress  of  the  commercial 
community  have  been  much  greater  than  it  is,  but  the 
public  moneys  themselves  would  have  been  placed  in 
imminent  danger.""  In  fact,  the  situation  was  such  that 
there  would  probably  have  been  a  repetition  of  the  events 
of  1837,  and  the  "divorce  of  bank  and  state"  was  justi- 
fied by  the  danger  which  it  had  evidently  enabled  the 
Government  to  avoid.  In  1837  the  failure  of  the  banks 
caused  the  Government  great  embarrassment.  In  1857 
the  banks  had  again  failed ;  but  the  Government,  having  its 
money  in  its  own  hands,  was  able  to  pay  its  debts,  and 
met  every  liability  without  trouble.  Said  the  Secretary 
of  the  Treasury:  "It  has  resorted  to  no  expedient  to 
meet  the  claims  of  its  creditors,  but  with  promptness 
pays  each  one  upon  presentation."     It  is  not  to  be  won- 

<»  Finance  Report,  1857. 
73 


National    M on  et ar y     Commission 

dered  at  that  such  a  showing  should  wed  people  to  the 
system.  Its  practical  success  in  preserving  the  credit 
of  the  Government,  or  at  least  in  making  its  financial 
operations  easier,  was  an  object  lesson  that  appealed  to 
the  public. 

Secretary  Cobb's  claim  that  the  specie  disbursements 
of  the  Government  afforded  relief  to  the  money  market 
was  doubtless  true.  But  this  fact  by  itself  does  not 
prove  that  the  operations  of  the  subtreasury  system 
were  wholly  beneficial.  It  must  also  be  shown  that  its 
previous  absorption  of  this  specie  did  not  bring  on  or 
intensify  the  monetary  pressure.  Certainly  it  could  not 
now  be  said  that  the  system  had  prevented  overissue  by 
the  banks,  in  face  of  the  prostration  of  credit  that 
had  overtaken  them.  It  is  possible  that  the  Treasury 
absorption  of  money  made  place  for  the  bank  issues. 
Thus  one  of  the  claims,  of  which  most  was  jnade  in  favor 
of  the  "constitutional  treasury,"  that  it  would  check 
excessive  issues  of  bank  notes,  was  shown  by  the  occur- 
rences of  1857  to  have  less  ground  than  had  been  supposed. 
Even  Mr.  Howell  Cobb,  the  Secretary  of  the  Treasury, 
ardent  supporter  as  he  was  of  the  policy,  was  compelled 
to  admit  that  the  anticipations  of  its  friends  that  it  would 
so  operate  were  true  only  "to  a  limited  extent."  The 
obvious  explanation  is  that  contraction  of  the  circulation 
by  Treasury  absorption  is  good  only  when  the  circulation 
is  redundant. 

The  collection  and  disbursement  of  the  revenue  went 
on  during  the  panic,  according  to  the  Secretary,  without 
"loss  or  embarrassment,"  and  the  subtreasury  system 
was   "eminently   successful."     There   was   no   loss   from 

74 


Independent  Treasury  of  the   United    States 

faithless  officers,  the  expense  of  its  operation  was  small, 
and  it  had,  in  the  opinion  of  the  government  officers,  no 
bad  effect  on  business.  President  Buchanan  took  the 
same  view  as  did  his  Secretary  of  the  beneficial  operation 
of  the  sub  treasury.  In  his  annual  message,  December  7, 
1857,  he  said:  "Thanks  to  the  independent  treasury,  the 
Government  has  not  suspended  [specie]  payments,  as  it 
was  compelled  to  do  by  the  failure  of  the  banks  in  1837. 
It  will  continue  to  discharge  its  liabilities  to  the  people 
in  gold  and  silver.  Its  disbursements  in  coin  pass  into 
circulation  and  materially  assist  in  restoring  a  sound 
currency." 

During  the  financial  year,  1858,  bond  purchases  were 
continued  to  the  amount  of  nearly  $4,000,000,  and  con- 
tributed somewhat  to  the  mitigation  of  the  disasters  of 
the  revulsion.  However,  in  view  of  the  fact  that  the  excess 
of  exports  of  specie  over  imports  for  the  year  amounted 
to  over  $33,000,000  it  is  clear  that  the  influence  produced 
on  the  whole  volume  of  currency  by  the  amount  set  free 
from  the  Treasury  must  have  been  very  insignificant. 

After  the  country  recovered  from  the  effects  of  the 
panic  its  progress  was  very  rapid.  From  1858  to  1861  it 
was  prosperous,  and  the  banks  held  a  strong  specie 
reserve.  The  expenditure  of  the  Government  for  three 
years  exceeded  its  receipts  by  about  $90,000,000,  and  the 
deficit  was  met  by  loans.  Under  an  act  of  December  23, 
1857,  over  $52,000,000  of  treasury  notes  were  issued. 
They  were  redeemable  in  one  year,  bore  interest  ranging 
from  3  to  6  per  cent,  and  were  sold  at  par.  In  June,  1858, 
bonds  to  the  amount  of  $20,000,000,  redeemable  in  fifteen 
years,  were  sold  at  a  premium.     In  June,    i860,  came 

75 


National    Monetary     Commission 

$7,000,000  more,  which  also  sold  at  a  premium,  though  a 
smaller  one;  and  in  December  of  the  same  year  an  issue 
of  $10,000,000  of  treasury  notes  was  authorized.  They 
sold  at  par.  The  needs  of  the  Government  under  the 
stress  of  war  necessitated  the  placing  of  several  more 
loans,  both  in  bonds  and  treasury  notes,  all  of  which,  with 
one  exception,  were  placed  at,  or  above,  par.  This  is 
true  even  of  the  demand  notes  of  1861,  although  it  was 
only  with  some  difficulty  that  the  employees  of  the  Gov- 
ernment were  persuaded  to  receive  them.  As  yet  the 
Government  was  true  to  its  resolution  to  maintain  itself 
on  the  specie  basis  that  formed  the  keystone  of  the  inde- 
pendent treasury  system.  However,  under  the  act  of 
July  17,  1 86 1,  Secretary  Chase  applied  to  the  banks  for  a 
loan  of  $50,000,000  in  seven-thirty  bonds,  payable  in  three 
years.  The  loans  of  the  Mexican  war  had  been  placed 
independently  of  the  banks.  The  Treasury  had  been  its 
own  broker.  This  solicitation  of  aid  from  the  banks  was, 
therefore,  another  step  away  from  the  principle  on  which 
the  independent  treasury  system  had  been  built.  It  was 
a  little  step.  The  banks  were  not  yet  to  handle  the  gov- 
ernment receipts  or  to  have  the  custody  of  its  money. 
But  it  was  a  look  backward  to  the  policy  abandoned  in 
1846.  The  act,  however,  was  a  necessity.  The  Govern- 
ment needed  gold,  and  the  only  large  accumulated  stock 
of  that  metal  was  in  the  banks.  Their  specie  reserve 
amounted  to  about  $87,000,000,  and  they  were  strength- 
ening their  position.  In  August  the  Secretary  had  a 
conference  in  New  York  with  representative  bankers  of 
New  York,  Philadelphia,  and  Boston,  with  reference  to 
the  requested  loan.     The  Government  was  provided  with 


Independent   Treasury  of  the   United  States 

money,  which,  being  expended  in  miHtary  operations, 
found  its  way  back  to  the  banks  and  enabled  them  to  make 
a  further  advance  of  a  similar  amount  soon  afterwards. 
Between  August  19  and  November  19,  1861,  Secretary 
Chase  borrowed  more  than  $140,000,000  from  the  banks. 
The  specie  held  by  them  in  August,  the  time  of  the  first 
loan,  was  $47,000,000;  in  December,  after  most  of  the  last 
loan  had  been  paid,  it  had  decreased  only  by  about 
$5,000,000.  The  recuperative  power  of  the  banks  was 
thus  clearly  shown. 

But,  while  borrowing  the  gold  of  the  banks,  Mr.  Chase 
was  also  driving  their  notes  from  circulation  by  the  issue 
of  treasury  notes,  and  the  bank  notes  coming  in  for  re- 
demption created  a  new  drain  on  the  gold  reserves  of  the 
banks.  The  banks  could  furnish  the  Secretary  with  gold, 
or  they  could  sustain  the  credit  of  their  notes.  But  they 
could  hardly  be  expected  to  do  both.  Accordingly  they 
urged  the  Secretary  to  cease  the  issue  of  the  treasury  notes 
and  to  use  bank  notes.  The  Government  refused  to  do 
so,  however,  and  in  December,  1861,  the  banks  suspended 
specie  payment.  Had  the  Secretary  withdrawn  the 
treasury  notes  and  accepted  the  bank  issues,  it  would  have 
been  a  departure  from  the  independent  treasury  law. 
But  possibly  the  banks  would  not  then  have  been  com- 
pelled to  suspend,  and  the  Government  could  have  kept 
the  spirit  of  the  specie  clause  of  the  law  inviolate.  In 
avoiding  Scylla  Mr.  Chase  fell  into  Charybdis.  That  the 
banks  would  have  avoided  suspension  if  the  Government 
had  accepted  their  notes  is,  of  course,  by  no  means  cer- 
tain. It  is  possible,  perhaps  probable,  that  the  briskness 
of  business  caused  by  the  war  would  soon  have  induced 

77 


National    M o  n  et  ar y     Commission 

the  banks  to  overissue,  and  specie  payments  might  have 
been  suspended  just  the  same.  Certainly  the  mere 
acceptance  of  the  notes  by  the  Government,  while  it 
would  have  greatly  strengthened  the  credit  of  the  banks, 
could  not  have  prevented  their  notes  from  depreciating 
unless  at  the  same  time  the  Government  could  have 
limited  their  issue. 

It  is  not,  indeed,  true  that  the  main  responsibility  for 
the  suspension  of  specie  payments  by  the  banks  can 
fairly  be  laid  on  the  independent  treasury,  for  the  banks 
could  have  refused  to  lend  to  the  Government,  and  so 
could  have  kept  their  gold  for  the  redemption  of  their 
notes;  but  if  they  had  done  so,  treasury  notes  would 
early  have  been  issued,  in  even  greater  numbers  than  they 
actually  were,  and  they  would  inevitably  have  increased 
beyond  the  power  of  the  Government  to  keep  them  at 
par.  The  independent-treasury  law  permitted  the  issue 
of  treasury  notes,  and  so  far  contributed  toward  the  tend- 
ency to  suspension.  But  the  real  force  making  for  sus- 
pension was  the  policy  of  Congress  and  the  Treasury 
Department  in  trying  to  meet  the  expenses  of  the  war  by 
loans,  with  as  slight  an  increase  of  taxation  as  possible. 
The  treasury  notes  contemplated  by  the  independent- 
treasury  law  were  convertible,  and  to  be  issued  for  a  short 
time.  The  notes  of  the  war  period  evidently  violated 
the  spirit  of  the  law,  though  keeping  within  its  letter. 
There  is  reason  for  thinking,  however,  that  if  the  Govern- 
ment had  used  bank  notes  instead  of  treasury  notes 
suspension  could  have  been  postponed  and  perhaps 
avoided. 


78 


Independent   Treasury  of  the    United  States 

The  suspension  of  specie  payments  by  the  banks  was 
necessarily  followed,  and  that  within  a  week,  by  a  similar 
action  on  the  part  of  the  Government.  On  January  6, 
1862,  "it  dishonored  its  own  promises — it  ceased  paying 
coin,"  and  gold  immediately  went  to  a  premium  of  2  per 
cent.  Of  the  two  evils,  acceptance  of  bank  notes  in 
payment  of  government  dues  and  the  suspension  of  specie 
payments,  the  first,  of  course,  was  infinitely  the  less.  The 
mistake  of  Secretary  Chase  was  in  thinking  he  could  avoid 
both. 

Thus  the  most  important  provision  of  the  independent- 
treasury  act  of  1846  was  made  of  no  effect.  The  Govern- 
ment had  been  solicitous  about  keeping  the  public  money 
safe  from  banks  and  bankers  that  would  not,  or  could 
not,  redeem  their  notes ;  but  it  turned  itself  to  the  manu- 
facture, by  the  hundred  million,  of  "greenbacks,"  which 
were  forced  on  creditors  in  payment  of  the  hard-earned 
dollars  they  had  loaned.  From  this  time  on,  then,  cer- 
tainly until  the  resumption  of  specie  payments,  the  sub- 
treasury  law  was  largely  a  dead  letter. 

Still,  the  abandonment  of  the  system  of  "  divorce  of  bank 
and  state"  was  not  complete.  The  sub  treasury  remained 
in  form.  The  legal- tender  notes  were  not  receivable  for 
customs  dues,  because  the  Government  had  to  have  some 
specie,  and  there  was  now  no  way  of  getting  it  as  a  current 
receipt  except  by  making  these  duties  payable  in  gold. 

We  read  nothing  more  in  the  treasury  reports  about 
the  subtreasuries  beyond  the  mere  official  reports  of  their 
transactions  until  1863.  During  that  financial  year,  we  are 
told,  the  receipts  and  disbursements  of  the  assistant  treas- 


79 


National     Monetary     Commission 

urers  at  San  Francisco  and  St.  Louis,  and  of  the  desig- 
nated depositaries,  especially  at  Baltimore,  Cincinnati,  and 
Louisville,  were  "large  beyond  precedent."  Of  course, 
this  simply  meant  that  government  financial  matters  had, 
in  the  conduct  of  the  war,  suddenly  leaped  to  gigantic 
proportions.  The  duties  of  the  officers,  the  Secretary 
assures  us,  were  well  performed.  Meantime  the  plan  of 
paying  government  dues  by  means  of  transfer  checks  on 
the  assistant  treasurers  at  New  York,  Philadelphia,  Bos- 
ton, and  San  Francisco  had  been  adopted,  and  Treasurer 
Spinner  informs  us,  in  1863,  that  the  plan  had  proved  of 
signal  "benefit  to  the  public  creditors  and  an  essential  aid 
to  the  business  of  the  department."  The  number  of  these 
checks  had  increased  form  i  ,484  in  the  financial  year  of 
1 861  to  30,526  in  1863.  In  the  latter  year  $159,864,954 
were  thus  transferred.  By  the  use  of  these  the  necessity 
for  the  actual  transfer  of  specie  was  obviated. 

In  1880  an  effort  was  made  to  extend  the  system  by 
the  establishment  of  a  sub  treasury  at  Louisville,  Ky. 
The  petition  was  refused,  the  Finance  Committee  of  the 
Senate  pointing  out  that  the  only  advantage  that  the 
establishment  would  bring  to  Louisville  would  be  to  save 
its  people  the  expense  of  carrying  coin  to  the  nearest 
subtreasury  for  redemption  and  exchange,  and  that  it 
would  be  cheaper  for  the  Government  to  pay  express 
charges  on  all  these  shipments  than  it  would  be  to  main- 
tain a  subtreasury. 

The  following  table "  shows  the  extent  of  the  use  of 
banks  by  the  Government  for  the  deposit  of  public  money, 

o Finance  Report,  1906:  196. 


80 


Independent    Treasury  of  the    United   States 


from  the  establishment  of  the  Treasury  Department  until 
the  creation  of  the  present  national  banking  system. 


Dec.  31,  1789  .  , 
Mar.  31,  1790.  . 
June  30,  1790- 
Sept.  30,  1790 . 
Dec.  31,  1790  .  • 
June  30,  1 791  • 
Sept.  30,  1791  . 
Dec.  31,  1791 .  . 
Mar.  31,  1792  •  • 
June  30,  1792  • 
Sept.  30,  1792  . 
Dec.  31,  1792  .  . 
Mar.  31,  1793-  • 
June  30,  1793  . 
Dec.  31.  1793  ■  ■ 
Dec.  31; 

1794 

I79S 

1796 

1797 

1798 

1799 

1800 

1801 

l802 

1803 

1804 

I80S 

1806 

1807 

1808 

1809 


1810. 
I8II . 

r8i2. 
1813. 
1814. 
1815. 
1816. 
1817. 


Number 

depositary 

banks. 


Balances. 


$28. 
60, 
iSS. 
349. 
S70. 
571. 
679. 
973. 
7SI. 
623, 
420, 
783. 
1.03s. 
S6i. 
753. 

1.  151. 
516. 
888. 

1,021, 
617, 

2,  161, 
2,623, 
3. 29s. 
5. 020, 
4.82s, 
4.037, 
3.999. 
4.538. 
9.643. 
9.941. 
3.848, 
2,  672, 
3.502. 
3.862. 

S. 196. 

1.727. 
13. 106, 
22.033, 
14.989. 

1.478. 

2.  079, 


239.61 
613. 14 
320.  23 
670. 23 
023. 80 
699. 00 
579-99 
90S- 75 
377-34 
133-61 
914  SI 
212.37 
973-09 
435-33 
661 . 69 

924-  17 
442.  61 
995-42 
899. 04 
451-43 
867.77 
311-99 
391-  00 
697  64 
811.60 
005. 26 
388.99 
123.80 
850.07 
809. 96 
056.78 
276-  57 
305-80 
217. 41 
542- 00 
848.63 
592.88 
519. 19 
465.48 
526. 74 
992-38 


41969°— 10- 


81 


National    Monetary     Commission 


Number 

depositary 

tanks. 


Balances. 


Dec.  31 — Continued. 


I»20. 
182I  . 
1822. 
1823. 
1824. 
1825. 
1826. 
1827. 
1828. 
1829. 
1830. 
183I. 
1832. 
1833. 
1834. 
1835. 
1836. 
1837- 
1838. 
1839. 

1840  . 

1841  . 
1842. 

June  30: 
1843- 
1844  . 


1845. 
1846. 
1847. 
1848. 
1849. 
1850. 
1851  . 
1852. 
1853. 
1854. 
1855. 
1856. 
1857. 
1858. 
1859. 
i86o. 
1861. 
1862. 
1863. 


198, 461. 21 
681,592.  24 
193. 690. 68 
431.353- 20 
887,  799.80 
296,306. 74 
342,  289.  48 
649.  604.  31 
965,974.  27 
362,  770.  76 
761,409.34 
053.513- 24 
911, 863. 16 
658,283.61 
861 , 093. 60 
729,315- 72 
056,833.54 
779.34301 
364,887.61 
992,319- 44 
290.532- 18 
170,361. 73 
699, 709. 09 


10, 525, 267. 10 
8,  222.  651.  19 
7.385.  450.82 
8,915,869-83 


Independent   Treasury  of  the    United  States 

"The  Secretary  of  the  Treasury  determines  the  number 
of  such  depositories,  the  amount  of  pubHc  money  required 
in  each  for  the  transaction  of  the  pubHc  business,  fixes  the 
amount  of  balances  they  may  hold,  and  requires  the  banks 
thus  designated  to  give  satisfactory  security,  by  the  de- 
posit of  United  States  bonds  and  otherwise,  for  the  safe- 
keeping and  prompt  payment  of  the  public  money  depos- 
ited with  them  and  for  the  faithful  performance  of  their 
duties  as  financial  agents  of  the  Government.  The  regular 
depositories  receive  and  disburse  the  public  moneys,  and 
are  required  to  pay  interest  at*  the  rate  of  i  per  cent  per 
annum  on  the  average  monthly  amount  of  public  deposits 
held  in  excess  of  the  sum  needed  for  the  transaction  of  the 
public  business,  while  the  special  depositories  hold  only 
the  moneys  transferred  to  them  from  the  Treasury.  They 
pay  interest  at  the  same  rate  on  the  average  monthly 
amount  of  public  deposits  held."" 


«  Finance  Report,  1909,  142 


83 


Chapter  IV. — The  Organization  and  Work  of  the 
Independent  Treasury. 

provisions  for  keeping  the  public  money. 

The  independent  treasury,  as  at  present  organized,  con- 
sists of  the  Treasury  offices  at  Washington  and  nine  sub- 
treasuries  under  the  charge  of  assistant  treasurers.  In 
carrying  on  its  monetary  operations  in  1908-9  the  Gov- 
ernment has  also  utiUzed  a  varying  number  of  designated 
depositaries,  including  the  treasury  of  the  Philippine 
Islands,  the  American  Colonial  Bank  of  Porto  Rico,  the 
Banco  de  la  Habana,  and  the  National  Bank  of  Cuba. 

The  supervision  of  the  independent  treasury  comes 
under  the  charge  of  the  chief  of  the  division  of  public 
moneys  in  the  Treasury  Department.  Among  other 
duties,  according  to  the  rules  of  the  Treasury,  that  division 
must  perform  the  following: 

"The  supervision  of  the  several  independent  treasury 
offices,  the  designation  of  national-bank  and  other  deposi- 
taries, and  the  obtaining  from  them  of  proper  securities. 

"  The  directing  of  all  public  officers,  except  postmasters, 
as  to  the  deposit  of  public  moneys  collected  by  them. 

"The  issue  and  enforcement  of  regulations  governing 
independent  treasury  officers,  and  the  several  depositaries 
and  public  disbursing  officers,  in  the  safe-keeping  and 
disbursement  of  public  moneys  intrusted  to  them. 

"The  direction  for  special  transfers  of  public  moneys 
and  generally  all  matters  pertaining  to  the  foregoing. " '^ 

a  The  Organization  of  the  Office  of  the  Secretary  of  the  Treasury,  published 
by  Treasury  Department,  July,  1884.  Department  circulars  describing 
methods  of  issue  and  redemption  of  currency,  treatment  of  disbursing 
officers'  checks,  etc.,  are  given  in  the  appendix. 

84 


Independent   Treasury  of  the    United   States 


The  places  at  which  subtreasuries  are  at  present  located 
are  Baltimore,  Boston,  Chicago,  Cincinnati,  New  Orleans, 
New  York,  Philadelphia,  San  Francisco,  and  St.  Louis. 
The  relative  importance  of  each  is  shown  by  the  amount 
of  business  done  for  the  fiscal  year  1909.'* 


Baltimore  .  .  .  . 

Boston 

Chicago 

Cincinnati .  .  . 
New  Orleans . 
New  York .  .  . 
Philadelphia  . 
San  Francisco 
St.  Louis .... 


Receipts. 


$102. 81S, 13s 

156. S04, 72s 

398, 002, 896 

66.392.568 

54.  464.360 

I,  802,315,952 

313,687,394 

90, 846, 461 

140, 776, 861 


Disbursements. 


$102, 565,652 

157.312,  586 

385,817,865 

63, 452, III 

56,  636.350 

1.859.063,475 

313. 290, 852 

84, 480. 240 

136, 006, 667 


The  following  table  shows  the  comparative  growth  of 
the  staff  and  expense  of  the  subtreasuries  from  1849  to 
1909: 


1849. 

1909. 

OflScers  and 
clerks. 

Salaries. 

Employees.      Salaries. 

Baltimore 

24                  «.^A     r^r^r. 

a 
2 

$3,400 
3.400 

31 

45.710 

Charleston 

Chicago 

so 

17 

20 

130 

36 
30 
18 

72.650 

24, 410 

28,890 

206, 510 

49. 440 

40, 540 
30. 420 

Cincinnati 

New  Orleans 

2 
6 
2 
2 

I,  400 
9,  100 
1 ,  400 
3.400 

New  York 

Philadelphia 

St.  Louis 

San  Francisco 

Total 

14 

18. 700 

356 

532.570 

Contingent    expenses    and    salaries   of    special    agents 
amounted  to  $20,000  more  in  1849,  making  the  total  ex- 

<»  Finance  Report,  1909:  74 
85 


National     Monetary     Commission 

penditure  on  the  independent  treasury  at  that  time 
$38,000."  At  present,  in  addition  to  the  expenses  for 
salaries  and  wages,  $3,000  are  appropriated  for  salaries 
of  special  agents  and  expenses  of  examiners  of  subtreas- 
uries  and  depositaries;  $14,000  for  paper  for  checks, 
drafts,  etc. ;  and  $260,000  for  contingent  expenses  in  the 
collection,  safe-keeping,  transfer  and  disbursement,  and 
for  transportation  of  notes,  bonds,  and  other  securities. 
These  amounts  added  to  that  for  salaries  and  wages  give 
us  a  grand  total  of  $809,570  for  the  expenses  of  the  inde- 
pendent treasury  for  the  fiscal  year  1909-10.''' 

A  law  of  March  2,  1853,  fixed  the  compensation  of  the 
officers  of  appointed  depositaries  at  one-half  of  i  per  cent 
on  the  first  $100,000  received;  one-fourth  of  i  per  cent  on 
the  second  equal  amount;  and  one-eighth  of  i  per  cent  on 
all  sums  over  $200,000.  The  depositary  paid  his  own 
rent  out  of  the  sum  thus  received.  These  provisions  were 
not,  however,  to  apply  to  offices  in  which  the  maximum 
compensation  allowed  by  law  was  already  received.  Nor 
could  any  officer  receive  a  commission  that  would  make  his 
total  income  greater  than  such  maximum ;  and  the  whole 
amount  received  by  any  one  depositary  could  not  exceed 
$1,500. 

The  exigencies  of  the  civil  war  rendered  an  enlargement 
of  the  number  of  depositaries  necessary  until  the  national 
banks  were  established  in  considerable  numbers.  Deposi- 
taries have  existed  at  one  time  or  another  in  the  following 
places,  in  addition  to  the  sub  treasuries  mentioned  in  the 

oBxec.  Doc.  No.  4,  31st  Cong.,  ist  sess. 

&  Estimates  of  appropriations,  House  Doc.  177,  6ist  Cong.,  2d  sess., 
48ff.,  395- 

86 


Independent   Treasury  of  the    United   States 

table  above:  Buffalo,  N.  Y.;  Charlotte,  N.  C;  Dahlonega, 
Ga. ;  Denver,  Colo. ;  Dubuque,  Iowa;  Jeffersonville,  Ind.; 
Little  Rock,  Ark.;  Louisville,  Ky.;  Mobile,  Ala.;  Nash- 
ville, Tenn.;  Norfolk,  Va.;  Pittsburg,  Pa.;  Richmond, 
Va. ;  Santa  Fe,  N.  Mex. ;  Tallahassee,  Fla. ;  and  Wil- 
mington, Del.  Some  of  these  were  made  assay  offices  by 
the  coinage  law  of  1873  and  others  were  dropped  entirely. 

The  assistant  treasurer  and  all  officers  authorized  by 
law  to  act  as  such  are  required  to  give  bonds  for  the 
faithful  discharge  of  their  duties,  the  amount  to  be  fixed 
by  the  Secretary  of  the  Treasury,  and  the  sureties  to  be 
approved  by  the  Solicitor  of  the  Treasury.'* 

Not  only  has  the  amount  of  work  of  the  kind  originally 
performed  by  the  subtreasury  largely  increased,  but  the 
character  of  the  work  has  greatly  changed.  As  originally 
conceived  the  subtreasury  was,  in  its  organization,  so 
simple  that  its  accounts  might  possibly  have  been  kept 
in  the  simple  manner  ascribed  to  Gouge's  "  ingenious  cord- 
wainer."  ^  Its  duties  were  simply  the  receipt  and  pay- 
ment of  public  money,  in  coin  and  treasury  notes.  Their 
enlargement  is  due  to  the  financial  operations  connected 
with  and  consequent  on  the  civil  war;  to  the  monetary 
and  banking  policy  of  the  country;  and  to  the  great 
increase  of  government  receipts  and  expenditures. 

The  work  of  the  subtreasuries  consists,  in  general,  in 
receiving  and  paying  all  public  money,  receiving  deposits 
of  collecting  and  disbursing  officers,  and  in  issuing  and 
redeeming,  under  proper  regulations,  all  money  of  the 
United    States.     Besides    the    nine    assistant    treasurers 

o  U.  S.  Rev.  Stats.,  3600  ^  See  above,  p   38. 

87 


National    M  o  n  e  t  ar  y     Commission 

appointed  as  such,  the  superintendents  of  the  mints  at 
Carson  City  and  Boise  City  are  required  by  law  to  per- 
form the  duties  of  assistant  treasurers.  In  addition  to 
the  subtreasuries  the  national  banks  also  are  keepers  of 
the  public  money.  By  the  act  establishing  them  provi- 
sion was  made  for  depositing  the  receipts  from  internal 
revenue  in  these  banks,  and  they  have  been  used  by  the 
Government  for  that  purpose  ever  since.  An  effort  was 
made  in  1868  to  rescind  the  provision  of  the  law  making 
them  public  depositaries.  On  January  28  of  that  year  a 
bill  °  passed  the  House  of  Representatives  prohibiting 
the  deposit  of  public  money  in  banks  in  any  cities  or 
places  in  which  there  was  a  treasurer  or  an  assistant 
treasurer,  and  prohibiting  collectors  and  disbursers  of 
public  money  from  depositing  public  money  in  banks  if 
they  were  within  50  miles  of  a  subtreasury.  The  bill 
failed,  however,  to  become  a  law. 
^  The  banks  were  to  be  allowed  to  hold  public  money  on 
providing  security  by  the  deposit  of  United  States  bonds 
and  otherwise,  under  regulations  prescribed  by  the  Sec- 
retary of  the  Treasury.  The  custom  for  a  long  time  was 
to  allow  the  banks  to  hold  public  money  up  to  90  per  cent 
of  the  par  value  of  the  bonds  deposited  as  security.  But 
after  the  bonds  rose  so  as  to  command  high  premiums,  it 
became  unprofitable  for  the  banks  to  deposit  them  in 
advance  as  security  for  public  money,  because  the  money 
reached  them  only  as  it  was  collected  in  taxes,  and  this 
was  often  too  slow  a  process  to  be  to  their  advantage. 
Moreover,  the  practice  in  the  earlier  years  of  the  system 

a  H.  R.  bill  450.     See  House  Journal,  40th  Cong.,  2nd  sess.,  265. 


88 


Independent .  Treasury  of  the   United   States 

was  for  the  Treasurer  to  draw  against  his  bank  balances 
whenever  funds  were  needed.  "  In  consequence  the  bal- 
ances were  not  uniform,  but  fluctuated  from  60  per  cent 
to  par  of  the  face  value  of  the  security.  About  October, 
1886,  the  practice  became  quite  general  to  allow  a  fixed 
balance  equal  to  90  per  cent  of  the  face  value  of  the 
United  States  4  per  cent  bonds,  and  a  somewhat  smaller 
amount  on  4^^  and  3  per  cent  bonds.  This  rule  was 
changed  in  May,  1887,  and  a  balance  equal  to  par  allowed 
on  4  per  cents.  Later,  in  October,  in  view  of  the  strin- 
gency of  the  money  market  and  the  amount  of  surplus  in 
the  Treasury,  and  as  an  inducement  to  banks  to  become 
depositaries,  the  rule  was  again  changed  and  a  balance 
was  allowed  equal  to  no  per  cent  of  the  face  value  of  4 
per  cent  bonds  and  par  of  the  4^  per  cents  whenever  a 
sufficient  margin  remained  to  cover  the  largest  deposit 
likely  to  be  received  in  any  one  day."  « 

Secretary  Fairchild  also  increased  the  number  of 
depositary  banks  at  this  time,  and  raised  the  limit  of  the 
amount  of  money  that  could  be  held  by  any  one  bank 
from  one-half  to  one  million  dollars.* 

When  Secretary  Windom  assumed  the  Treasury  port- 
folio, he  changed  the  policy  of  his  predecessor  as  to  the 
extent  of  the  use  of  the  national  banks  as  depositaries, 
and  the  amount  of  money  held  by  them  was  reduced. 
Under  the  law  and  the  regulations  of  the  Treasury, 
collectors  and  surveyors  of  customs,  collectors  of  internal 
revenue,  and  other  receivers  of  public  moneys  who  live 

«  Ex.  Doc.  No.  243,  50th   Cong.,    ist   sess.     (Secretary  Fairchild  in   a 
letter  to  the  House  of  Representatives.) 

&  Commercial  and  Financial  Chronicle,  October  15,  1887. 

89 


National    Monetary     Commission 

in  a  town  in  which  there  is  a  subtreasury  or  a  national 
bank  depositary  are  required  to  deposit  their  receipts 
daily.  Officers  who  are  unable  to  do  this  on  account 
of  their  distance  from  a  depositary  are  required  to  forward 
their  receipts  when  they  reach  the  sum  of  $i,ooo,  and 
at  the  end  of  each  month  whether  they  reach  this  amount 
or  not.  Attorneys,  marshals,  and  court  clerks  of  the 
United  States  who  have  occasion  to  receive  public  money 
are  also  required  to  deposit  according  to  the  regula- 
tions above  mentioned.  Disbursing  officers  are  required 
to  deposit  disbursing  funds  to  their  official  credit,  and 
must  deposit  such  moneys  with  a  treasurer  or  assistant 
treasurer  or  a  national  bank  depository  authorized  by 
the  Secretary  for  that  purpose.  It  will  be  noticed  that 
under  the  law  disbursing  officers  may  not  place  their 
funds  in  national  bank  depositaries  without  special 
permission  of  the  Secretary  of  the  Treasury.  If  neither 
a  subtreasury  nor  a  national  bank  depositary  is  available, 
the  Secretary  may,  under  the  law,  authorize  disbursing 
officers  to  keep  their  funds  as  he  thinks  best.  Failure 
to  comply  with  the  provisions  of  the  law  as  to  making 
deposits  renders  the  offender  indictable  for  embezzle- 
ment. Depositaries  are  required  to  keep  accounts  of 
post-office  deposits  separate  from  other  accounts  of  public 
money. 

Disbursing  clerks,  agents  of  the  executive  department, 
independent  officers,  and  commissions  are  directed  to 
make  their  deposits  on  or  before  the  5th  and  20th  of 
each  month  in  the  United  States  Treasury,  and  any  cash 
balances  drawn  to  meet  pay  rolls  which  have  not  yet 
been  paid  out  are  held  until  the  next  regular  pay  day,  and 

90 


Independent    Treasury  of  the    United    States 

after  that  they  are  therefore  obliged  to  make  payment 
by  check. 

Circulars  issued  from  time  to  time  by  the  Treasury 
Department  give  instructions  concerning  the  proper 
discharge  of  the  various  duties  of  assistant  treasurers. 

The  sources  of  the  receipts  of  a  subtreasury  are  new 
currency  from  Washington;  deposits  for  transfer  by 
the  Treasury  Department  to  other  points;  customs; 
transfers  of  public  money  from  depositary  banks;  sales 
of  gold  by  the  assay  office;  internal  revenue;  patent  fees; 
the  annual  tax  on  national  banks ;  deposits  of  postmasters 
for  the  account  of  the  Post-Office  Department;  deposits 
for  the  shipment  of  silver  coin;  and  deposits  by  indi- 
viduals, banks,  and  firms  for  redemption  and  exchange. 
These  last  may  be  mutilated  or  worn  money,  or  it  may 
be  money  of  one  kind,  in  good  condition,  deposited  in 
exchange  for  another  kind,  as  greenbacks  for  gold,  or 
vice  versa.  The  subtreasury  is  a  money-receiving,  money- 
paying,  and  money-exchanging  establishment. 

The  subtreasury  at  New  York  is  divided  into  depart- 
ments, as  follows:  The  receiving  and  the  paying  depart- 
ments, the  minor-coins  department,  the  bonds  department, 
and  the  checks  department.  As  a  matter  of  fact  the 
classification  is  in  practice  carried  further,  so  that  there 
may  be  distinguished  the  general  receiving  and  the  gold- 
receiving  departments,  the  general  paying  and  the  coin- 
paying  departments,  the  coupon  division,  the  registered 
interest  division,  the  accounting  and  auditing  division, 
and  the  bookkeeper's  division. 

The  general  receiving  department  is  that  into  which 
all  money  other  than   gold  is  paid.     All  notes  paid  in 

91 


National    Monetary     Commission 

are  counted  and  sorted  here,  and  counterfeits  detected 
and  thrown  out.  National-bank  notes  as  well  as  govern- 
ment notes  are  received,  for  the  Government  accepts 
them  now  in  payment  of  all  dues  except  customs. 

The  "checks  division"  has  charge  of  the  receipt,  pay- 
ment, and  issue  of  all  checks.  It  is  really  a  part  of  both 
the  receiving  and  the  paying  departments. 

The  number  of  checks  handled  is  very  large.  Probably 
at  least  two-thirds  of  the  whole  number  of  pensions  are 
paid  in  checks  on  New  York,  making  a  million  and  a  half 
or  more  checks  annually  from  this  source  alone.  Besides 
these,  the  New  York  subtreasury  pays  checks  of  several 
hundred  disbursing  officers,  paymasters,  quartermasters, 
and  others,  who  use  in  all  nearly  half  a  million  checks 
a  year. 

In  the  coins  division  a  subdivision  of  labor  is  necessary 
on  account  of  the  great  number  of  coins  that  are  received 
of  different  denominations.  Hence  in  the  minor-coins 
division  there  are  clerks  whose  whole  time  is  taken  up  in 
receiving,  counting,  and  sorting  coins  of  only  one  or  two 
different  denominations,  as  i-cent  and  5-cent  pieces. 

The  coupon  and  the  registered  interest  divisions  are,  of 
course,  really  divisions  of  the  bonds  department,  and  their 
business  is  confined  to  dealing  with  the  public  debt. 

The  accounting  department  is  the  one  in  which  all 
checks  are  finally  gathered,  classified,  entered,  and  veri- 
fied; and  all  accounts  of  disbursing  officers  are  rendered 
monthly.  It  may  be  noticed  in  this  connection  that  the 
accounts  of  the  General  Treasury  are  kept  separate  from 
those  of  disbursing  officers.  In  the  work  of  this  depart- 
ment we  find  an  explanation  of  a  fact  which  we  shall  have 

9^ 


Independent   Treasury  of  the    United   States 

occasion  to  note  later,  that  sometimes  the  reported 
receipts  and  disbursements  of  the  subtreasury  do  not 
correspond  with  the  amounts  of  money  actually  received 
or  disbursed,  for  there  are  many  transfer  transactions 
which  appear  only  on  the  books.  For  example,  the 
Treasurer  transfers  from  the  cash  in  the  office,  held  on 
account  of  the  General  Treasury,  $1,000,000,  to  be  placed 
to  the  credit  of  a  pension  agent,  against  which  the  latter 
issues  checks.  On  the  books,  that  is  treated  as  a  payment 
from  the  General  Treasury  and  a  receipt  by  the  pension 
agent's  account,  although  no  money  is  actually  paid  out 
until  the  pension  agent's  checks  begin  to  come  in. 

The  names  of  the  other  departments  carry  with  them  a 
sufficient  explanation  of  the  work  done  in  them. 

There  are  many  interesting  points  of  detail  that  are 
worth  noticing.  The  visitor  to  the  Treasury,  or  to  a  sub- 
treasury,  is  always  interested  in  seeing  the  provisions  for 
the  safe-keeping  of  the  money  on  hand.  It  is  kept  in 
vaults,  or  strong  rooms,  usually  in  the  basement  of  the 
building.  There  are  five  of  these  vaults  in  the  New  York 
subtreasury.  Four  of  them  are  bright  apartments,  well 
lighted  by  electricity,  on  the  main  floor  of  the  building, 
one  on  each  side,  and  one  under  each  of  the  Pine  street 
side  corners  of  the  rotunda  floor.  These  "vaults"  are 
simply  large  safes,  or  strong  rooms,  full  of  steel  drawers, 
and  fitted  with  steel  walls,  ceilings,  floors,  and  doors. 
The  fifth  strong  room  may  be  accurately  termed  a  vault; 
it  is  the  largest  of  the  five  and  is  situated  in  the  basement. 
"Just  where  all  this  money  is  stored,  on  the  site  of  the 
subtreasury,  once  stood  old  Federal  Hall,  where  the  first 
Congress  of  the  United  States  met  when  the  future  of 

93 


National    Monetary     Commission 

this  country  was  in  the  balance;  and  in  front  of  the  sub- 
treasury  building  was  George  Washington  inaugurated  as 
first  President  of  the  United  States."  <^ 

Fitted  into  the  walls  of  the  vaults  in  which  silver  is 
kept  are  iron  boxes,  or  closets,  of  uniform  size,  each 
large  enough  to  hold  loo  bags  of  silver  containing 
$5,000  apiece.  As  much  as  $40,000,000  or  $50,000,000 
of  silver  is  sometimes  collected  in  a  single  vault.  The 
notes  are  stored  in  packages,  each  denomination  by 
itself,  and  1,000  notes  to  a  package.  This  arrangement 
is  convenient  both  for  storing  and  for  counting. 

There  is  a  large  portion  of  the  money  in  the  subtreasury 
that  is  constantly  on  deposit — that  is,  is  seldom  paid  out. 
This  is  true  of  the  larger  part  of  the  silver,  which  is  repre- 
sented in  circulation  by  certificates.  This  money  is  kept 
in  vaults  sealed  with  the  seals  of  the  assistant  treasurer 
and  of  some  representative  of  the  Treasurer  of  the  United 
States.  When  it  becomes  necessary  to  open  one  of  these 
vaults,  the  seals  must  be  broken  and  the  vault  unlocked 
in  the  presence  of  both  parties  interested,  or  in  that  of 
their  duly  appointed  representatives. 

The  ordinary  vaults,  those  which  are  in  use  every  day, 
are  in  the  charge  of  a  vault  keeper,  can  not  be  entered 
except  in  his  presence,  and  even  then  only  during  business 
hours,  because  most  of  the  vaults  are  fitted  with  time 
locks. 

The  accounts  of  the  subtreasury  are,  of  course,  bal- 
anced every  day,  and  a  statement  of  the  day's  business  is 
forwarded  to  Washington. 

o  New  York  Times,  November  9,  1890. 


94 


Independent   Treasury  of  the   United   States 

Not  the  least  interesting  work  performed  at  the  sub- 
treasury  is,  to  the  casual  visitor,  the  details  of  the  redemp- 
tion of  currency.  Mutilated  currency  usually  reaches  the 
subtreasury  in  the  form  of  deposits,  or  is  sent  in  for  re- 
demption by  the  banks,  while  very  often  men  come  alone 
and  make  inquiry  about  doubtful  bills.  The  deposits 
contain  new  as  well  as  old  notes,  and  sometimes  counter- 
feits. The  clerks  assort  the  bills  as  they  are  counted, 
putting  together  those  that  are  still  fit  for  circulation. 
The  larger  part  of  the  mutilated  money  consists  of  bills 
of  small  denominations,  ones,  twos,  and  fives  forming 
the  heaviest  contribution.  The  good  bills  are  sent  over 
to  the  paying  department  for  disbursement,  while  the 
mutilated  ones  are  tied  up  in  packages  of  loo  bills 
each,  and  are  canceled  by  having  a  hole  of  about  the 
same  diameter  as  that  of  a  lead  pencil  punched  through 
them.  The  punched  bills  are  then  sent  on  to  Washington, 
where  they  are  counted;  they  are  then  split  in  halves 
lengthwise,  and  are  recounted  twice.  If  the  count  is 
found  to  be  correct,  the  canceled  bills  are  then  ground  to 
pulp,  and  so  destroyed. 

The  clerks  in  the  receiving  department,  besides  culling 
out  the  mutilated  bills  that  come  into  the  Treasury,  are 
on  the  constant  lookout  for  counterfeits.  So  quick  are 
they  in  detecting  spurious  paper  that,  although  they 
may  be  counting  bills  at  the  rate  of  loo  a  minute,  the 
momentary  glance  at  a  bill  as  it  passes  under  their  eyes  is 
sufficient  to  let  them  know  whether  it  is  good  or  bad.  On 
an  average  between  200  and  300  counterfeit  bills  a  month 
are  brought  into  the  subtreasury.     When  a  counterfeit  is 


95 


National    Monetary     Commission 

found,  it  is  stamped  with  a  steel  die  that  cuts  the  word 
"counterfeit"  in  large  letters  out  of  the  bill.  Counter- 
feits are  not,  however,  confined  to  notes.  There  are 
counterfeit  coins  also.  Filled  coins  are  the  most  danger- 
ous of  this  class,  especially  filled  gold  coins,  as  they  are  the 
most  profitable.  The  coin  in  this  case  has  been  cut  open 
and  a  portion  of  the  gold  taken  out;  it  is  then  filled  in 
with  some  base  metal  which  gives  it  approximately  cor- 
rect weight.  These  coins  circulate  with  the  public,  but 
the  subtreasury  clerks  promptly  detect  them  and  throw 
them  out. 

The  precautions  taken  for  preventing  robbery  are,  of 
course,  great.  The  contrast  between  the  defenses  of  the 
New  York  subtreasury  and  those  which  Gouge  so  graph- 
ically described  in  1854  "  is,  in  its  degree  and  kind,  of  the 
same  general  character  as  that  between  the  state  of  the 
progress  of  the  country  then  and  now.  Iron  shutters, 
steel  barred  doors,  and  a  dozen  or  more  armed  watchmen 
and  detectives  furnish  security  to  a  mass  of  treasure 
greater  probably  than  the  founders  of  the  independent 
treasury  ever  dreamed  would  be  in  its  possession. 

BANKING     FUNCTIONS     OF     THE     INDEPENDENT     TREASURY 

SYSTEM. 

The  independence  aimed  at  by  the  establishment  of 
the  independent  treasury  was  independence  of  the  banks 
of  the  country,  first,  as  to  the  safe-keeping  of  the  public 
money;  and,  second,  as  to  the  steadiness  of  value  of  the 
currency.     To  accomplish  the  first  purpose  the  Govern- 

a  See  Finance  Report,  1854. 
96 


Independent   Treasury  of  the    United  States 

ment  provided  its  own  depositaries.  To  secure  the 
second  it  refused  to  receive  bank  notes,  and,  when  the 
civil  war  broke  out,  it  issued  its  own  notes.  The  Treasury- 
became,  in  a  way,  a  bank  of  issue,  and  thereby  opened 
the  way  for  as  far-reaching  and  mischievous  interference 
with  the  money  market  as  has  ever  been  produced  by 
the  alternate  contractions  and  expansions  of  the  currency 
caused  by  its  independence  in  the  matter  of  deposits. 

The  evils  of  the  attempt  to  have  an  independent  gov- 
ernment currency  became  evident  when  Secretary  Chase 
made  his  attempts  to  borrow  the  specie  of  the  New  York 
banks  in  1861  and  1862.  The  Government,  under  the 
independent  treasury  law,  was  obliged  to  be  independent 
of  the  banks  in  the  sense  that  it  must  not  use  their  notes. 
If,  therefore,  the  Treasury  was  to  get  money  to  carry  on 
its  now  extensive  operations  it  must  use  specie  or  issue 
Treasury  notes.  Secretary  Chase  felt  that  he  must  actually 
secure  and  put  in  the  government  vaults  in  the  form  of 
specie  the  amounts  of  the  loans  made  him  by  the  New 
York  banks.  But  if  he  locked  it  up  the  banks  could  not 
keep  it  as  a  reserve  against  their  notes.  It  could  not 
be  in  both  places  at  once.  Therefore  Secretary  Chase's 
policy  involved  a  double  contraction  of  the  currency — 
the  withdrawal  of  the  specie  from  the  banks  and  the  con- 
traction of  the  bank-note  circulation  in  consequence. 
As  we  shall  see  when  discussing  the  relation  of  the  sub- 
treasury  to  the  management  of  loans,  the  banks  could 
not  stand  such  a  strain.  The  Secretary  therefore  main- 
tained the  independence  of  the  Treasury  in  the  matter 
of  currency  by  resorting  to  Treasury  notes.     This  was  a 

41969°— 10 7  97 


National    Monetary     Commission 

kind  of  independence  which  was  not  specifically  contem- 
plated, although  it  was  distinctly  enough  implied,  by 
the  act  of  1846. 

After  the  country  entered  upon  the  policy  of  the  use 
of  fiat  paper  it  made  several  attempts  to  maintain  its 
independence  of  the  banks  in  the  currency  it  used.  To 
be  sure,  with  the  establishment  of  the  present  national 
banking  system,  the  Government  acquiesced  in  the  use 
of  notes  issued  imder  it,  but  was  not  content  to  let  these 
serve  its  purpose  altogether.  The  use  of  irredeemable 
paper  continued  until  1879,  and  the  notes,  though  now 
redeemable,  are  still  in  use.  In  addition,  the  Government 
entered  upon  a  curious  career  in  its  silver  policy  in  1878 
and  1890.  The  evils  of  the  independence  of  the  Treasury 
as  to  the  kind  of  currency  it  shall  use  were  especially 
evident  in  the  period  when  the  Treasury  showed  an  excess 
of  expenditures  over  receipts  and  at  the  same  time  stress 
in  the  money  market  and  depression  in  business  caused 
a  run  upon  it  for  the  exchange  of  its  independent  money 
for  the  specie  with  which  the  world  is  willing  to  settle  its 
debts.  The  most  serious  portion  of  the  experience  was, 
of  course,  in  the  five  years  following  1890;  although 
students  of  the  subject  need  not  be  told  that  evils  of  no 
little  magnitude  had  been  caused  in  this  w^ay  in  the 
preceding  twenty  years.  The  lessons  of  the  experience 
of  the  years  from  1890  to  1895  were  strong  enough  to 
force  us  a  few  years  later  to  adopt  some  reasonable  meas- 
ures of  protection  in  the  management  of  the  Treasury  as 
a  bank.  To  a  full  understanding  of  the  independence  of 
the  Treasury,  therefore,  it  is  necessary  to  give  some  atten- 
tion to  what  may  properly  be  called  its  banking  functions. 


Independent   Treasury  of  the    United   States 

The  history  of  the  independent  treasury  shows  that  for 
long  periods  it  has  performed  some  of  the  functions  of  a 
bank  of  deposit  and  issue.  It  has  redeemed  United 
States  notes  since  they  came  into  use,  and  has  for  many 
years  undertaken  the  service  of  transferring  funds  from 
one  part  of  the  country  to  another.  Of  late  years,  how- 
ever, its  banking  activities  have  been  greatly  enlarged. 

To  the  extent  that  it  is  required  by  law  to  receive 
money  on  deposit,  and  to  pay  it,  or  to  issue  notes  and  re- 
deem them  on  demand,  it  is  engaged  in  a  business  which 
can  not  be  conducted  without  having  ability  to  comply 
promptly  with  its  obligations.  As  Secretary  Carlisle 
wrote  in  i893:«  "Under  existing  legislation  the  Treasury 
Department  exercises  to  a  larger  extent  than  all  the 
other  financial  institutions  of  the  country  combined  the 
functions  of  a  bank  of  issue  *  *  *.  While  the  laws 
have  imposed  upon  the  Treasury  Department  all  the 
duties  and  responsibilities  of  a  bank  of  issue,  and  to  a  cer- 
tain extent  the  functions  of  a  bank  of  deposit,  they  have 
not  conferred  upon  the  Secretary  any  part  of  the  discre- 
tionary powers  usually  possessed  by  the  executive  heads 
of  institutions  engaged  in  conducting  this  character  of 
financial  business."  The  subtreasuries  act  as  banks  of 
deposit,  issue,  and  redemption,  and  as  agents  for  the 
transfer  of  currency  from  one  part  of  the  country  to 
another.  In  addition  to  performing  these  services,  the 
New  York  subtreasury  is  also  a  storage  warehouse  or 
depot  for  gold  and  silver  bullion  used  in  international 
exchange  to  settle  trade  balances.  If  we  were  to  enumer- 
ate the  specific  banking  functions  of  the  Treasury,  they 

o Finance  Report,  1893:   Ixxiii. 
99 


National     Monetary     Commission 

would  be  as  follows:  (i)  It  issues  and  redeems  paper 
money — United  States  and  Treasury  notes;  (2)  it  ex- 
changes various  kinds  of  money  for  one  another;  (3)  it 
prepares  and  supervises  the  issue  of,  and  redeems,  national 
bank  notes;  (4)  it  transfers  money  to  move  the  crops; 
(5)  it  supervises  the  division  of  the  money  of  the  country 
into  proper  denominations  so  as  to  furnish  the  proper 
supplies  of  large  and  small  notes,  respectively;  (6)  it  acts 
as  a  regulator  of  the  rate  of  discount  by  contracting  and 
expanding  the  currency  through  its  operations  upon  the 
deposits  in  banks  and  in  its  own  vaults;  (7)  it  keeps 
the  gold  reserve  of  the  country. 

A  brief  account  of  the  mode  and  conditions  of  the  issue 
and  redemption  of  currency  by  the  subtreasury  system 
will  be  interesting.  All  United  States  notes,  and  all 
national  bank  notes,  that  are  unfit  for  redemption,  are 
replaced  with  new  notes  at  the  Treasury,  or  at  a  sub- 
treasury,  free  of  charge;  and  United  States  notes  are 
redeemed  in  gold,  in  sums  not  less  than  $50,  at  the  sub- 
treasuries  in  New  York  and  San  Francisco;  gold  certifi- 
cates are  issued  for  not  less  than  $20  on  deposit  of  gold 
coin  at  a  subtreasury ;  silver  certificates  are .  issued  for 
silver  deposits,  or  for  other,  worn-out,  certificates;  and 
treasury  notes  of  the  law  of  1890  are  exchanged  for  silver 
bullion. 

Silver  dollars  are  exchanged  at  the  Treasury  or  a  sub- 
treasury  for  silver  certificates;  and  fractional  silver  is 
issued  in  any  amount  desired  in  exchange  for  government 
or  bank  notes.  On  the  other  hand,  fractional  silver  coin 
and  minor  coin  may  be  deposited  in  sums  of  $20,  or  mul- 
tiples   of     twenty     and    "lawful     money"    received    in 


Independent   Treasury  of  the    United   States 


exchange.     Standard  silver  dollars  are  exchangeable  for 
silver  certificates  only. 

Since  the  issue  of  the  United  States  notes  known  as 
greenbacks  it  has  been  the  business  of  the  Treasury  to 
receive  or  redeem  and  reissue  these  notes.  They  are 
issued,  to  be  sure,  not  on  the  basis  of  discount,  as  they 
would  be  if  the  Treasury  were  a  true  bank,  but  in  the 
payment  of  other  obligations.  Moreover,  their  amount  is 
fixed.  The  extent  to  which  these  practices  of  redemption 
and  reissue  are  carried  is  scarcely  realized  by  the  majority 
of  our  people.  To  go  back  only  a  few  years,  we  find 
that  in  1897  the  issue  of  United  States  paper  currency 
and  certificates  was  $374,848,000  and  the  redemptions 
$330,710,020.  The  Secretary  of  the  Treasury,  in  his 
report  for  the  same  year,  adds  that  the  presentation  of 
national-bank  notes  for  redemption  was  so  large  as  to 
overtax  the  staff  of  employees  who  counted  and  sorted 
them,  so  that  it  was  necessary  to  secure  some  of  the  general 
funds  of  the  Treasury  to  meet  the  expenses.  For  the 
years  following  1897  the  issues  and  redemptions  of  all 
kinds  of  paper  currency  were  as  follows: 


1899 
1900 
1901 
1902 
1903 
1904 
190S 
1906 
1907 
1908 
1909 


Issued. 


5i.  310. 
301, 
49S. 
407. 
466, 
S5I. 
650, 
637. 
629, 
698. 
804, 
764, 


677. 000 
276, 000 
S4S, 000 
102, 000 
908, 000 
038, 000 
026, 000 
540. 000 
826, 000 
273, 000 
326,  000 
510, 000 


Redeemed. 


$338. 
309. 
327. 
3S8. 
408, 
488. 
56s. 
623, 
S77. 
S82, 
66s, 
722, 


3S7.020 
808.330 
257. 424 
891, 490 
083, 600 
SS8, 220 
340.300 
026, 600 
445. 100 
902. 000 
220, 000 
395, 000 


National     Monetary     Commission 

In  the  fiscal  year  1908-9  the  United  States  notes  issued 
and  redeemed  were  $132,940,000.  These  redemptions 
were,  of  course,  largely  exchanges  of  notes  of  one  denomi- 
nation for  those  of  other  denominations.  The  largest 
number  of  exchanges  is  due  to  a  demand  for  small  denom- 
inations for  circulation,  on  the  one  hand,  and  for  large 
denominations  to  be  used  by  the  subtreasury  in  the  settle- 
ment of  clearing-house  balances,  on  the  other.  Gold 
certificates  were  issued  in  the  same  year  to  the  amount  of 
$294,710,000  and  the  redemption  of  these  certificates 
amounted  to  $261,892,000.  Silver  certificates  were  issued 
to  the  amount  of  $336,860,000  and  redeemed  to  the  amount 
of  $326,796,000.  Under  existing  conditions  the  annual 
redemption  of  United  States  notes  and  treasury  notes  in 
gold  is,  of  course,  relatively  unimportant.  In  1908-9 
United  States  notes  were  redeemed  in  gold  to  the  amount 
of  $19,984,536  and  treasury  notes  of  1890  to  the 
amount  of  $3 1 ,405.  We  are  not  likely  to  have  a  repetition 
of  the  "  endless-chain  "  process  of  1893.  For  several  years 
about  that  time  the  redemptions,  of  course,  were  very 
large.  They  rose  from  a  little  under  $6,000,000  in  1891 
to  $102,100,345  in  1893  and  to  more  than  $158,655,956 
in  1896.  After  that  the  amount  thus  redeemed  gradually 
fell  to  $8,267,245  in  1903.  Since  that  time  it  has  increased 
slowly,  until  in  1909  it  was  a  little  over  $20,015,941. 
These  statements  are  sufficient  to  show  the  extent  of  the 
business  of  the  Treasury  in  the  matter  of  issue  and  re- 
demption. 

The  exchange  of  one  kind  of  money  for  another  is,  of 
course,  included  in  what  is  called  redemption  in  the 
treasury  reports.     Redemption  in  the  proper  sense  refers 


Independent   Treasury  of  the   United   States 

to  the  acceptance  of  notes  in  exchange  for  gold,  and  the 
figures  last  given  in  the  above  paragraph  are  the  ones  that 
have  reference  to  this  process  in  its  true  sense.  The 
Treasury  has  been  obliged  at  times  to  make  a  distinct 
effort  to  push  certain  kinds  of  money  into  circulation. 
This  has  been  notably  true  several  times  of  the  standard 
silver  dollars.  Standard  silver  dollars  presented  at  the 
Treasury  office  for  exchange  during  the  fiscal  year  1908-9 
amounted  to  $23,488,604,  which  was  a  considerable 
decrease  over  that  of  the  preceding  year.  Subsidiary  coin 
is  also  redeemed  by  the  Treasury  to  a  considerable  extent, 
and  the  amount  in  the  fiscal  year  ending  June  30,  1909, 
was  over  $56,000,000.  One  service  which  the  Treasury 
is  rendering  now  is  to  retire  the  treasury  notes  of  1890  as 
fast  as  silver  dollars  are  coined. 

Under  the  head  of  "  Issue  and  redemption  of  currency  " 
is  included  the  transfer  of  money  from  one  part  of  the 
country  to  another.  The  transfer  here  spoken  of  must  be 
distinguished  from  the  transfer  of  the  Government's  own 
money.  This  transfer  relates  to  the  money  of  individuals 
or  of  banks  deposited  at  some  subtreasury.  Formerly 
the  banks  themselves  paid  the  full  expense  of  shipping 
money  to  the  interior  to  meet  the  demand  for  "moving 
the  crops."  But  after  the  Bland  silver  law  went  into 
effect  it  was  soon  found  that  the  silver  dollars  were  accu- 
mulating in  the  Treasury  instead  of  passing  permanently 
into  circulation.  To  overcome  this  difficulty  the  Secretary 
of  the  Treasury  took  advantage  of  the  usual  fall  move- 
ment of  the  currency  to  send  silver  to  the  interior  and  at 
the  same  time  to  increase  the  Treasury  reserve  of  gold. 
In  September,  1880,  he  issued  a  circular  authorizing  the 

103 


National     Monetary     Commission 

delivery  of  silver  certificates  at  subtreasuries  in  the  inte- 
rior in  exchange  for  gold  deposited  at  the  subtreasury  in 
New  York,  and  the  Government  paid  the  express  charges. 
The  order  was  rescinded  in  January,  1885,  and  the  present 
system  adopted  instead. ° 

In  the  crisis  of  1890  a  further  step  was  taken.  To 
relieve  the  money  market  at  that  time,  the  Secretary 
of  the  Treasury  authorized  the  assistant  treasurer  at 
San  Francisco  to  receive  deposits  of  funds  from  bankers 
who  desired  to  transfer  them  by  telegraph  to  the  assistant 
treasurer  at  New  York.  The  purpose  was  to  enable 
those  having  money  in  San  Francisco,  which  was  not 
needed  there,  to  transfer  it  for  immediate  use  in  New 
York.  The  same  privilege  was  promised  to  other  places 
at  which  there  were  subtreasuries,  if  it  proved  of  any 
service  in  affording  relief.  The  order  was  soon  com- 
plained of,  however,  by  the  San  Francisco  bankers,  on 
the  ground  that  it  diminished  their  available  reserve. 
The  amount  of  transfers  under  the  circular  was  over  three 
million  dollars. 

The  regulations  which  cover  the  issue  and  redemption 
of  paper  currency  and  the  specie  of  the  United  States 
give  an  adequate  idea  of  the  work  of  the  subtreasuries 
in  the  matter  of  issue  and  redemption.  According  to 
these  regulations,  (i)  new  currency  is  sent  in  return 
for  currency  unfit  for  circulation,  and  for  national-bank 
notes  and  minor  coin  received  for  redemption.  (2)  Silver 
certificates  are  issued  also  by  assistant  treasurers  in 
exchange   for  standard   silver   dollars.     (3)   Gold   certifi- 

oSee  p.  105  and  Appendix  3. 


104 


Independent   Treasury  of  the    United   States 

cates  are  issued  for  gold  coin.  (4)  Gold  coin  is  paid  out 
by  the  treasurer  or  subtreasurers  for  gold  certificates, 
United  States  notes,  and  treasury  notes  of  1890.  (5) 
Standard  silver  dollars  are  sent  by  express  at  the  expense 
of  the  consignee  in  exchange  for  silver  certificates  or 
treasury  notes  of  1890.  Charging  the  expense  to  the 
consignee  is  a  departure  from  the  old  policy  noted  above 
whereby  the  Government  paid  the  express  charges  in 
order  to  induce  the  banks  in  the  interior  to  take  silver 
dollars  and  put  them  into  circulation.  (6)  Subsidiary 
silver  coin  is  exchanged  for  United  States  notes  or  bank 
notes,  and  it  is  sent  from  the  nearest  subtreasury  at 
the  expense  of  the  Government.  If  the  consignee  pre- 
fers to  have  the  coin  come  by  registered  mail,  it  will  be  so 
sent  at  his  risk,  but  with  postage  registration  free.  (7) 
Nickels  and  pennies  are  exchanged  for  United  States 
notes  or  bank  notes,  and  sent  by  express  on  the  same 
terms  as  subsidiary  silver  coin.  Both  subsidiary  silver 
coin  and  notes  may  be  obtained,  however,  by  drafts  sent 
to  the  Treasurer  or  assistant  treasurer  in  New  York, 
payable  to  the  order  of  this  officer.  The  transportation 
charges  on  new  silver  or  minor  coin  sent  direct  from  the 
mints  must  be  paid  by  the  consignee.  (8)  Gold  is  paid 
out,  of  course,  in  the  redemption  of  United  States  notes, 
treasury  notes  of  1890,  and  gold  certificates.  Silver  cer- 
tificates are  redeemable  in  silver  dollars  at  the  Treasury 
or  any  subtreasury.  National-bank  notes  are  redeemed 
at  the  United  States  Treasury  only,  and  not  at  the  sub- 
treasuries. 

Provisions  are  made  for   the   redemption  of  overworn 
currency,  and  careful  instructions  are  given  by  the  depart- 

105 


National     Monetary     Commission 

ment  as  to  the  mode  of  packing  and  sending  currency 
for  redemption  and  exchange.  One  of  the  latest  circu- 
lars on  the  subject  will  be  found  in  the  appendix. 

The  national-bank  notes  redeemed  during  the  fiscal  year 
1909  amounted  to  $461 ,522,202,  and  were  67.8  per  cent  of 
the  average  outstanding  circulation  for  the  year.  The 
amount  redeemed  varies  considerably  from  year  to  year. 

The  words  "money  for  moving  the  crops"  have  come 
to  be  a  familiar  heading  in  the  Treasury  reports  of  the 
United  States.  The  service  to  be  performed  in  this 
connection  is  not  only  to  furnish  the  proper  amount  of 
small  denominations  of  currency,  but  also  to  see  to  its 
proper  geographical  or  economic  distribution.  As  has 
been  said,  the  method  of  transfer  is  for  the  banks  in  the 
interior  cities  to  call  on  their  New  York  creditors  to  deposit 
gold  at  the  subtreasur}^  and  in  exchange  for  this  the 
Secretary  of  the  Treasury  orders  payment  of  the  amount 
to  the  creditor  bank  in  the  kinds  of  money  called  for  at 
the  home  bank.  In  the  fiscal  year  ending  June  30,  1909, 
the  subtreasury  at  New  York  received  $10,250,000  in 
gold  coin  and  certificates  during  the  months  of  April, 
May,  June,  August,  and  September.  The  Treasurer 
and  assistant  treasurers  of  the  United  States  paid  for 
this  deposit  with  $450,000  of  United  States  notes  to 
banks  in  Washington,  $9,500,000  to  banks  in  San  Fran- 
cisco, and  $300,000  to  banks  in  New  Orleans.  "The 
Treasury  is  called  upon  every  year  to  provide  small 
denominations  of  paper  to  facilitate  the  movement  of  the 
crops.  A  large  part  of  this  business  is  done  by  the 
deposit  of  funds  with  the  assistant  treasurer  in  New 
York,    for    which    payment    is    made    by    the    assistant 

106 


Independent   Treasury  of  the    United   States 

treasurers  in  New  Orleans,  St.  Louis,  or  Chicago,  respec- 
tively."" 

The  supply  of  notes  of  small  denominations  is  of  course 
a  matter  of  great  importance.  Notwithstanding  the  great 
development  of  our  bank-check  system,  what  is  needed 
in  the  country  districts  during  the  spring  and  autumn 
is  a  sufficient  amount  of  currency.  This  must  be  of  such 
denominations  as  suits  wage  payments.  Consequently 
the  United  States  Treasurer  takes  especial  care  to  furnish 
denominations  of  the  proper  amount.  In  the  opinion 
of  the  Treasurer,  as  expressed  in  his  report  for  1909, 
there  had  been  so  considerable  an  increase  in  the  volume 
of  small  denominations  of  currency  during  the  past  few 
years,  and  its  distribution  had  become  so  much  more  gen- 
eral throughout  the  country,  that  the  volume  of  requests 
for  money  to  assist  in  moving  the  crops  during  the  fall  of 
that  year  was  much  less  than  formerly.  According  to  the 
same  report,  all  denominations  of  ten  dollars  and  less  was 
53.85  per  cent  of  the  total  paper  currency  on  October  i, 
1909.  This  shows  a  small  relative  decrease,  though,  as 
the  Treasurer  says,  there  has  been  an  absolute  increase. 

We  need  not  here  expatiate  upon  the  action  of  the 
Treasury  as  a  regulator  of  the  rate  of  discount.  The  whole 
story  of  its  operations  for  nearly  fifteen  years,  and  espe- 
cially for  the  past  eight  years,  is  a  history  of  its  attempts 
to  keep  the  money  market  steady  and  the  rate  of  dis- 
count equable  by  alternate  deposits  and  withdrawals 
of  the  public  money  in  the  national  banks,  as  well  as  by 
the  sale  of  bonds  and  other  devices  that  we  will  discuss 
later. 

•^  U.  S.  Treasurer's  Report,  1900:  21. 
107 


National    Monetary     Commission 

The  Treasury  keeps  the  gold  reserve  of  the  country. 
This  function  was  assigned  to  it,  by  impHcation,  by  that 
clause  of  the  specie-resumption  law  which  established  the 
gold  reserve.  But  it  is  the  act  of  March  14,  1900,  which 
specifically  and  in  great  detail  fixes  and  describes  the 
banking  functions  of  the  Treasury,  especially  its  duty  to 
keep  the  gold  reserve  of  the  country.  By  that  act  the 
Treasury  was  divided  into  two  departments,  one  of  them 
the  ordinary  fiscal  department  of  the  Government,  and  the 
other  the  department  of  issue  and  redemption,  virtually  a 
bank.  Under  the  provisions  of  the  law  the  Treasurer  is 
required  to  redeem  in  standard  gold  coin  all  United  States 
notes  and  Treasury  notes  of  1890.  For  this  purpose  the 
Secretary  of  the  Treasury  is  required  to  set  apart  a  reserve 
fund  of  $150,000,000  in  gold  coin  and  bullion.  This  fund 
succeeds  the  old  $100,000,000  reserve  which  had  been 
kept  by  the  Secretary  of  the  Treasury  under  the  implied 
authority  of  the  resumption  act.  This  fund  of  $150,000,- 
000  was  made  for  redemption  purposes  only,  as  above 
specified.  Whenever  the  Treasurer  redeems  United  States 
notes  he  is  required  to  use  the  notes  which  come  into  his 
hands  for  purposes  of  restoring  and  maintaining  the  gold 
reserve.  Three  methods  are  prescribed  for  doing  this. 
In  the  first  place  he  may  exchange  the  notes  redeemed 
for  gold  coin  in  the  general  fund  of  the  Treasury.  By  the 
second  method  he  may  accept  deposits  of  gold  coin  at 
any  subtreasury  or  at  the  main  office  of  the  Treasury  in 
exchange  for  redeemed  United  States  notes.  Or,  finally, 
he  may  obtain  gold  for  such  notes.''  If  he  finds  that  he 
is  not  able  by  any  one  of  these  means  to  keep  the  gold 

«  See  sec.  3700,  Rev.  Stats. 
108 


Independent   Treasury  of  the   United   States 

reserve  up  to  $100,000,000,  he  is  required  to  sell  bonds  in 
order  to  restore  it  to  the  maximum,  $150,000,000.  The 
gold  coin  received  from  the  sale  of  bonds  first  goes  into 
the  general  fund  of  the  Treasury,  and  is  then  exchanged 
for  notes  which  have  been  redeemed  and  are  held  in  the 
department  of  issue  and  redemption.  The  Secretary  is 
given  discretion  to  use  notes  which  have  thus  come  from 
the  department  of  issue  and  redemption  to  redeem  United 
States  bonds,  or  for  any  "  other  lawful  purpose  the  public 
interests  may  require,"  excepting  to  meet  deficiencies  in 
current  revenue.  Redeemed  notes  must  therefore  be 
held  in  the  reserve  fund  until  exchanged  for  gold.  The 
reserve  fund  must  be  entirely  of  gold  or  gold  and  redeemed 
notes  and  may  not  exceed  the  maximum  already  men- 
tioned. 

The  Division  of  Issue  and  Redemption  of  the  Treasury 
Department,  as  has  been  remarked,  has  been  assigned  the 
banking  functions  of  the  Treasury  so  far  as  relates  to 
issue  and  redemption  of  paper  money.  All  records  and 
accounts  relating  to  the  issue  and  redemption  of  United 
States  notes,  gold  certificates,  silver  certificates,  and  cur- 
rency certificates  are  now  in  charge  of  this  division.  It 
keeps  the  gold  coin  held  against  outstanding  gold  certifi- 
cates, United  States  notes  against  which  currency  certifi- 
cates have  been  issued,  and  silver  dollars  representing 
silver  certificates,  and  is  obliged  to  redeem  notes  and 
certificates  by  the  respective  funds  held  against  them. 
These  are  known  as  the  trust  funds  of  the  Treasury. 

Under  the  law  the  Secretary  may  issue  gold  certificates 
against  deposits  of  gold  coin  in  sums  of  not  less  than 
twenty  dollars.     This  right  of   issue,  however,  becomes 

109 


National     M  on  et  ar  y     Commission 

inoperative  when  the  gold  in  the  reserve  fund  is  below 
$100,000,000 

Another  provision  of  the  law  indirectly  made  it  the 
duty  of  the  Treasury  Department  to  provide  currency  of 
small  denominations  by  prescribing  the  denominations 
under  which  silver  certificates  may  hereafter  be  issued. 
There  are  other  provisions,  but  these  are  the  essential  and 
important  ones  for  our  purpose. 

An  examination  of  this  law  shows  that  it  makes  the 
issue  and  redemption  department  of  the  Treasury  a  bank 
of  deposit  and  issue.  Under  the  law  the  Treasury  receives 
deposits  of  gold  and  issues  warrants  or  certificates  against 
them.  It  issues  its  own  notes  and  holds  the  specie 
reserve  against  them.  It  exchanges  money  of  one  kind 
for  other  kinds.  It  performs  exchange  operations  by  a 
transfer  of  currency.  Under  the  national  banking  law  it 
virtually  issues  notes  against  a  deposit  of  bonds  without 
reserve.  All  these  services  it  performs  at  considerable 
expense  to  the  Government.  In  other  countries  the 
banks  perform  most  or  all  of  them  at  their  own  expense. 
In  the  function  of  issuing  bank  notes  against  bonds  it  is 
virtually  discounting  the  paper  of  the  issuing  banks  with- 
out direct  charge.  All  that  is  necessary  to  make  the 
Treasury  a  bank  of  discount  is  to  permit  it  to  accept 
securities  other  than  United  States  bonds  against  note 
issues.  If  the  law  permitted  it  to  accept  commercial  paper 
from  the  banks  and  to  give  them  additional  circulation  in 
exchange,  in  times  of  crisis  for  example,  it  would  be  per- 
forming practically  all  the  functions  of  a  great  central 
government  bank  and  have  all  the  functions  and  power 
necessary  to  "regulate  the  currency." 


Chapter   V. — The    Reaction   toward    Closer    Rei^a- 

TIONS   WITH   THE    BaNKS. 
THE   PERIOD   OP   FIAT   PAPER   MONEY. 

The  history  of  the  independent  treasury  since  the  crea- 
tion of  the  national  banks  is  a  record  of  gradual  departure 
from  independence,  both  in  practice  and  in  law.  The 
increasing  revenues  and  disbursements  of  the  Govern- 
ment and  the  irregularity  of  its  fiscal  operations  have 
produced  interference  with  business  to  a  larger  extent 
with  the  passage  of  the  years.  Efforts  by  the  Treasury 
to  correct  or  prevent  the  consequent  ill  effects  have 
become  much  more  frequent  and  brought  the  Govern- 
ment into  closer  relations  with  the  banks.  On  some  occa- 
sions, too,  the  necessities  of  the  Treasury  have  compelled 
it  to  rely  on  the  help  of  the  banks,  and  so  brought  them 
together  in  their  operations. 

The  law  establishing  the  present  national  banking  sys- 
tem, passed  February  25,  1863,'^  took  two  more  steps  away 
from  the  act  of  1846.  The  first  was  that  which  allowed 
national  banks,  designated  by  the  Secretary  of  the  Treas- 
ury, to  be  depositaries  of  public  moneys,  except  receipts 
from  customs,  under  regulations  to  be  prescribed  by  the 
Secretary  of  the  Treasury.  The  reason  for  prohibiting 
the  deposit  of  customs  receipts  in  the  banks  was  that 
these  were  paid  in  coin,  which  the  Government  needed, 
and  the  banks  had  suspended  specie  payments.  They 
were  required  to  give  security  by  the  "deposit  of  United 

«  U.  S.  Stat.  L.,  37th  Cong.,  3d  sess.,  p.  58,  sec.  54;  38th  Cong.,  ist  sess., 
p.  106,  sec.  45. 

Ill 


National     Monetary     Commission 

States  bonds  and  otherwise  for  the  safe-keeping  and 
prompt  payment  of  the  public  money  deposited  with 
them."  Postmasters  in  counties  which  had  no  designated 
depositaries,  treasurers  of  mints,  or  assistant  treasurers, 
or  the  Treasurer  of  the  United  States,  might  deposit  in 
the  national  banks  at  their  own  risk.  This  was  practi- 
cally a  reversal  of  the  act  of  seven  years  before,  which 
required  collecting  and  disbursing  officers  to  use  the  gov- 
ernment depositaries.  The  second  step  backward,  under 
the  national  banking  law,  consisted  in  giving  a  semi  legal- 
tender  character  to  the  notes  issued  by  banks  formed 
under  the  new  law.  These  notes  were  to  be  received  at 
par  in  all  parts  of  the  United  States  in  all  payments  to  and 
by  the  Government,  except  customs  and  interest  on  the 
public  debt,  respectively."  Had  this  same  use  of  the 
banks'  notes  been  legalized  two  years  before,  Secretary 
Chase's  hands  would  not  have  been  tied;  even  the  shadow 
of  excuse  for  suspension  would  have  been  taken  from  the 
banks,  the  "greenbacks  and  depreciation"  could  have 
been  easily  avoided,  and  the  monetary  history  of  the  suc- 
ceeding forty  years  would  doubtless  have  been  a  brighter 
record.  This  provision  of  law  was  almost  a  complete 
withdrawal  from  the  position  of  1846.  The  banks  might 
also,  by  this  law,  be  employed  as  the  financial  agents  of 
the  Government. 

In  this  same  year,  1863,  to  avoid  the  inconvenience  of 
handling  specie  for  the  payment  of  duties  and  of  interest 
on  the  public  debt,  the  deposit  of  gold  coin  and  bullion 
with  the  Treasurer  or  subtreasurers,  in  sums  of  not  less 
than  $20,  was  authorized;  and  certificates  were  issued  for 

«  Section  20  of  the  bank  act  of  1863. 


Independent   Treasury  of  the   United  States 

these,  in  denominations  of  not  less  than  $20,  and  corre- 
sponding with  the  denominations  of  United  States  notes. 
The  metal  had  to  be  kept  for  the  redemption  of  the  certifi- 
cates, which  were  used  in  the  payment  of  interest  and 
customs.  Thus  the  use  of  the  vaults  of  the  Government 
was  given  free  of  charge  to  bankers,  brokers,  and  bullion 
dealers  for  the  storage  of  their  specie. 

The  suspension  of  specie  payments  had  thrown  gold  on 
the  market  as  a  commodity,  and  speculation  in  it  soon 
became  rife.  The  violent  fluctuations  in  the  value  of  gold 
"reacted  upon  prices  and  turned  the  most  legitimate  of 
business  enterprises  into  a  kind  of  gambling."  The  prin- 
cipal causes  of  this  unfortunate  state  of  affairs  were  bad 
legislation  and  the  accumulation  of  gold  in  the  Treasury. 
The  amount  of  coin  received  for  customs  dues  had  exceeded 
the  payments  of  interest  on  the  public  debt  until,  in  1864, 
about  $50,000,000  were  stored  in  the  government  vaults. 
To  relieve  the  situation  Congress  authorized  the  Secretary 
of  the  Treasury  to  sell  the  surplus  gold  for  other  currency. 
He  did  so  to  the  extent  of  $1 1,000,000,  but  the  effect  was 
only  for  a  day.  The  fluctuations  of  the  value  of  the 
metal  continued  and  were  aggravated  by  the  alternate 
accumulation  and  sale  of  gold  by  the  Government. 

In  1866  the  organization  of  national  banks  was  well 
under  way,  and  the  system  had  proved  a  great  conven- 
ience. The  Treasiu-y  report  for  1866  says:  "The  employ- 
ment of  national  banks  as  depositories  of  public  moneys 
and  fiscal  agents  of  the  Government  has  been  a  great  aid 
to  the  department  in  the  placing  of  loans,  and  especially 
to  this  office,  in  the  collection  of  the  revenues  of  the  Govern- 
ment.    They  have  within  the  three  years  ending  with  the 

41969° — 10 8  113 


National     Monetary     Commission 

month  of  September,  1866,  received  moneys  on  deposit  to 
the  credit  of  the  United  States  as  follows: 

[Cents  have  been  omitted.] 

On  subscription  to  United  States  stocks $i,  ii6,  151,  286 

On  account  of  internal  revenue 599,  936,  712 

From  miscellaneous  sources 37,  443,  637 

Total  collections i,  753,  531,  636 

"They  have  paid  in  various  ways,  and  at  points  as 
directed  by  this  office,  and  without  expense  to  the  Gov- 
ernment, during  the  same  time,  $1,722,554,656." 

So  close  was  now  the  connection  between  the  banks  and 
the  financial  operations  of  the  Government  that  the 
"divorce  of  bank  and  state"  could  no  longer  be  said  to 
exist.  Said  the  Commercial  and  Financial  Chronicle  of 
April  4,  1868:  "The  Treasury,  so  far  from  being  severed 
from  the  banks,  may  now  at  certain  critical  periods 
possess  great  influence  over  them,  and  has  had  for  some 
weeks  past  almost  despotic  control  over  them,  because  it 
could  at  any  time  take  away  their  legal-tender  reserves 
by  sales  of  gold,  by  sales  of  bonds,  or  by  drawing  down  the 
balances  in  the  national-bank  depositories."  Yet  the  gap 
still  remaining  between  them,  due  to  the  fact  that  customs 
receipts,  which  were  in  gold,  could  not  be  deposited  in  the 
banks,  gave  Treasury  operations  a  dangerous  influence, 
made  more  so  because  the  coimtry  was  on  a  fiat  money 
basis. 

During  the  next  few  years  the  subtreasury  remained 
substantially  the  same  in  its  influence  and  mode  of  opera- 
tions, the  extent  of  the  latter  adapting  itself,  of  course,  to 
the  needs  of  government  business. 

In  1873  the  Government  undertook  virtually  to  per- 
form the  office  of  safe  depositary  for  the  banks  by  allow- 

114 


Independent   Treasury  of  the   United   States 

ing  them  to  deposit  legal-tender  notes  in  exchange  for  cer- 
tificates of  deposit  prepared  at  the  expense  of  the  Govern- 
ment. The  deposits  were  withdrawable  on  demand. 
This  meant  that  the  banks  could  use  the  subtreasury  to 
keep  them  in  notes  of  convenient  denominations  at  pub- 
lic expense. 

The  banking  work  of  the  Treasury  received  an  addi- 
tional impulse  in  this  year  by  the  reissue  of  legal-tender 
notes  that  had  been  once  paid,  but  which  Secretary  Bout- 
well  brilliantly  regarded  as  a  "reserve"  that  he  could 
put  out  again  to  increase  the  currency  and  so  relieve  a 
stringency.  This  was,  however,  but  a  trifling  interfer- 
ence with  business  relations  compared  with  others  that 
had  been  made  since  the  day  when  the  country  had  cut 
loose  from  the  safe  moorings  of  specie  payments  to  which 
she  had  been  definitely  tied  in  1846.  In  1873  came  the 
panic  and  the  scarcity  of  money  was  severely  felt.  Had 
the  country  been  on  a  specie  basis  the  distress  would  prob- 
ably have  been  much  less,  perhaps  scarcely  felt,  for  there 
lay  in  the  vaults  of  the  Treasury  and  subtreasuries 
$50,000,000  of  gold  which  could  not  be  used  to  relieve  the 
situation  because  the  specie  was  not  wanted  to  pay  private 
debts,  for  its  use  would  have  entailed  a  sacrifice  equal  to 
the  amount  of  the  premium  on  gold.  Secretary  Boutwell's 
"reserve"  was  brought  into  requisition  again.  In  Octo- 
ber Secretary  Richardson  thought  to  afford  some  relief  by 
instructing  the  subtreasury  officers  to  pay  out  silver  coin 
to  pubhc  creditors  who  wished  it  in  sums  not  exceeding 
$5  in  any  one  payment.  But  the  Treasury  held  too  few 
small  coins  to  make  an  impression  of  any  importance  on 
the  situation  by  such  a  step. 

"5 


National    Monetary     Commission 

The  next  part  of  importance  played  by  the  subtreasury 
system  was  at  the  time  of  the  resumption  of  specie  pay- 
ments, in  1879.  Secretary  Sherman  decided  to  pay  inter- 
est in  coin  at  the  New  York  subtreasury  only.  Other 
subtreasury  officers  were  to  pay  interest  to  all  who  would 
accept  legal-tender  notes.  The  subtreasury  at  New  York 
also  became  at  this  time  a  member  of  the  clearing  house, 
"to  a  certain  extent  and  for  certain  purposes."  The 
Government  agreed  to  collect  its  checks  through  the 
clearing  house  and  the  latter  to  receive  the  balances  due 
it  at  the  counter  of  the  subtreasury  and  to  accept  legal- 
tender  notes  in  payment  of  all  government  drafts.  Thus 
the  connection  of  the  Government  with  the  banks  became 
closer  than  ever.  As  the  notes  to  be  redeemed  were  gov- 
ernment notes,  the  gold  necessary  for  purposes  of  resump- 
tion was  accumulated  in  the  Treasury  vaults  and  not  in 
the  banks.  But  resumption  could  probably  not  have 
been  successful  without  the  aid  of  the  banks.  The  banks 
of  New  York  City  alone  held  $40,000,000  of  government 
paper,  and  the  presentation  of  these  doubtless  would  have 
shipwrecked  the  Treasury  plans.  But  the  banks  held 
them  back  and  so  strengthened  the  government  credit. 
Moreover,  so  far  the  largest  part  of  the  drafts  on  the 
subtreasury  passed  through  the  clearing  house,  and  as 
that  organization  had  agreed  not  to  call  for  specie  the 
actual  demand  for  coin  payments,  when  resumption  began, 
was  very  small. 

The  independence  of  the  Government  in  financial  opera- 
tions could  not  well  have  been  maintained  under  the  finan- 
cial conditions  into  which  the  nation  drifted  during  the 
war.     In  fact,  the  national  banks  were  avowedly  created 

116 


Independent   Treasury  of  the   United   States 

for  the  purpose  of  aiding  the  Government,  and  their  very 
estabhshment  was  an  abandonment  of  the  principle  of 
the  sub  treasury  act  of  1846.  Whether  it  would  have  been 
possible  to  get  on  during  the  war  without  the  aid  of  the 
banks  in  placing  loans,  even  if  the  government  finances 
had  been  differently  conducted,  is  a  question  the  correct 
answer  to  which  could  hardly  be  given  in  the  affirmative. 
But  it  was  not  only  in  loaning  to  the  Government  and 
in  aiding  resumption  that  the  banks  rendered  valuable 
services.  The  refunding  operations  that  have  from  time 
to  time  taken  place  would  have  been  at  least  exceedingly 
difficult  without  their  aid.  The  amount  of  labor  and 
expense  which  they  saved  the  Government  in  these  was 
very  great.  But  for  the  use  of  the  banks  as  depositaries 
the  money  paid  for  the  bonds  sold  "would  necessarily 
have  been  placed  in  the  subtreasury  to  await  the  matu- 
rity of  the  bonds  called  under  the  three  months'  notice 
required  by  law.""  At  the  end  of  April,  1879,  the  banks 
had  sold  $389,944,295  worth  of  bonds,  which  sum  would 
otherwise  have  gone  into  the  subtreasury  vaults,  to  be 
paid  out  only  as  the  bonds  matured  or  were  called  in. 
Thus  more  than  one-half  the  paper  circulation  of  the  coun- 
try would  have  been  withdrawn  from  use  and  the  results 
would  have  been  disastrous. 

A  DECADE  OF  VACILI.ATING  POLICY  AFTER  RESUMPTION. 

Before  the  resumption  of  specie  payments  in  1879  the 
extent  of  the  use  of  national  banks  by  the  Government 
was  mainly  dependent  on  the  amount  of  the  government 
fiscal  operations;  since  then  it  has  varied  mainly  accord- 

<»Proc.  Amer.  Bankers'  Assoc,  1880. 
117 


National    Monetary     Commission 

ing  to  the  views  of  the  Secretary  of  the  Treasury  or  the 
President. 

In  his  report  for  1885,  Treasurer  Conrad  Jordan  said 
that  "a  more  extended  use  of  the  banks  as  depositaries 
would  result  in  a  large  saving  to  the  Government,  and 
very  much  lessen  the  chances  of  loss  from  peculation  and 
frauds  in  the  conduct  of  the  operations  of  the  Treasury." 

In  1885  the  intimate  connection  of  the  Government 
with  the  banks  was  shown  very  emphatically  by  the  reli- 
ance of  the  Treasury  on  the  banks  to  extricate  it  from  the 
difficulty  into  which  it  was  brought  by  the  reduction  of 
its  gold  reserve. 

Silver  certificates  had  accumulated  at  money  centers 
on  account  of  the  dullness  of  business,  and  were  largely 
used  in  payments  to  the  Government.  So  fast  did  they 
come  in  that  anxiety  was  caused  as  to  the  ability  of  the 
Government  to  maintain  gold  payments.  In  March  the 
New  York  clearing  house,  in  order  to  relieve  the  Treasury, 
offered  to  receive  silver  certificates  in  part  settlement  of 
government  balances  due  it.  But  even  this  was  not 
sufficient.  By  the  last  of  May  the  government  holdings 
of  gold  had  sunk  to  $115,810,533,  including  the  green- 
back reserve  of  $100,000,000.  In  July  the  banks  of  New 
York  agreed  to  purchase  from  the  Government  from  ten 
to  twenty  million  dollars'  worth  of  subsidiary  silver,  and  to 
pay  for  it  at  par  in  gold.  The  difficulty  passed  away  after 
$5,000,000  of  gold  had  been  advanced.*^ 

o-  The  transaction  was  really  a  loan  of  gold  by  the  banks  to  the  Govern- 
ment, with  the  subsidiary  silver  as  security,  rather  than  a  sale;  and  the 
banks  soon  afterwards  got  back  their  gold.  There  is  some  doubt  whether 
the  transaction  was  really  necessary,  for  gold  began  very  soon  to  flow  into 
the  Treasury.  For  an  excellent  account  of  the  difficulty  and  the  means 
whereby  it  was  tided  over,  see  Taussig's  "The  Silver  Situation  in  the 
United  States,"  Publ.  Amer.  Econ.  Assoc,  vii:  i:  30-37. 

118 


Independent   Treasury  of  the   United   States 

In  1886  Mr.  Jordan  again  declared  that  the  arrange- 
ments for  collecting  and  disbursing  the  revenue  were 
defective,  and  recommended  a  larger  use  of  the  national 
banks.  A  bill  was  introduced  <^  in  the  House  of  Repre- 
sentatives to  reduce  the  amount  of  bonds  required  from 
national  bank  depositaries  and  so  restore  to  the  channels 
of  business  the  excessive  accumulations  of  money  in  the 
Treasury.  The  bill  was  never  acted  on,  and  nothing  came 
of  Mr.  Jordan's  suggestion. 

In  pursuance  of  the  policy  of  a  larger  use  of  national 
bank  depositaries,  which  animated  the  treasury  manage- 
ment during  the  Presidency  of  Mr.  Cleveland,  the  govern- 
ment deposits  in  banks  were  allowed  to  increase.  On 
January  i,  1887,  they  were  about  $20,000,000.  In  De- 
cember the  amoimt  was  $52,199,917,  and  in  April,  1888, 
it  had  become  $61,921,294.  The  purpose,  of  course,  was 
to  restore  to  circulation  the  money  taken  therefrom  in 
taxation  by  the  Government  and  locked  up  in  the  vaults 
of  the  subtreasuries,  on  the  ground  that  its  withdrawal 
contracted  the  currency  and  so  caused  distress.  The 
policy  was  reversed,  however,  by  Mr.  Windom  when  he 
became  Secretary  of  the  Treasury.  In  his  report  for  the 
fiscal  year  1889  he  condemns  the  use  of  the  banks  except 
for  the  deposit  of  such  sums  as  are  necessary  for  the  busi- 
ness transactions  of  the  Government.  Under  his  man- 
agement the  bank  deposits  were  reduced  by  October,  1889, 
to  $47,495,479,  and  he  declared  his  intention  of  making 
a  further  reduction  of  $30,000,000.  "The  national  bank 
depositaries  have  been,  and  are,"  he  says,  "useful  aux- 
iliaries to  the  sub  treasury  system,  but  the  deposit  of  pub- 

o  Dec.  20,  1886;  H.  R.  bill  No.  10324,  49th  Cong.,  2d  sess. 
H9 


National    Monetary     Commission 

lie  funds  therewith  to  an  amount  largely  in  excess  of  the 
needs  of  the  public  service  is  wholly  unjustifiable.  Such 
a  policy  is  contrary  to  the  spirit  of  the  act  of  August  6, 
1846,  which  contemplates  a  subtreasury  independent  of 
the  banks."  Whether  or  not  Mr.  Windom's  opinion  of 
the  benefits  of  the  subtreasury  is  correct,  he  was  certainly 
justified  in  his  wish  and  endeavor  to  observe  the  law. 

Throughout  these  twenty-five  or  thirty  years  there  oc- 
curred only  two  instances  of  loss  to  the  Government  from 
the  use  of  national  bank  depositaries.  Treasurer  Hyatt 
wrote  in  his  report  for  1887:  "The  only  losses  suffered  by 
the  Government  on  this  account,  since  the  present  system 
was  adopted,  occurred  over  twenty  years  ago.  Under  the 
present  method  of  Treasury  supervision  it  is  hardly  pos- 
sible for  any  losses  to  occur." 

"  The  early  losses  to  the  Government  were  caused  by 
the  failure  of  two  banks,  one  in  1863  and  one  in  i864.<* 
These  losses  have  been  more  than  coimterbalanced  by 
the  benefit  derived  from  the  increased  conveniences  for 
collecting  and  disbursing  the  revenues  of  the  Government 
without  incurring  any  expense  for  transportation  of  funds 
to  places  where  money  was  needed  for  the  payment  of  its 
creditors. ' ' 

We  have  seen  that  according  to  the  provisions  of  the 
banking  law  the  national  banks  were  made  the  legal 
depositaries  of  all  public  money  excepting  customs  re- 
ceipts. Of  course  the  bulk  of  the  deposits  was,  therefore, 
internal-revenue  receipts.  Postmasters  were  at  liberty 
to  deposit  in  banks  on  their  own  responsibility  where 
there  were  no  government  depositaries  at  hand. 


tt  See  the  Finance  Reports  for  these  years. 


Independent   Treasury  of  the   United   States 

The  significance  of  the  word  "deposit"  in  connection 
with  placing  public  money  in  the  banks  should  perhaps  be 
noted.  The  intent  of  the  law  was  that  the  banks  could 
receive  this  money  as  it  was  collected  by  the  proper 
officers.  The  law  did  not  give  authority  to  any  public 
officer  to  transfer  to  the  banks  money  already  actually 
deposited  in  the  Treasury,  subtreasury,  or  a  government 
depositary  other  than  a  bank,  except  to  the  credit  of 
disbursing  officers  for  the  payment  of  their  drafts.  There 
was  a  change  in  the  meaning  assigned  to  the  word  ' '  de- 
posits" about  1903.  Whereas  depositing  in  the  banks 
originally  meant  permitting  the  accumulating  revenues 
to  go  into  the  banks  from  the  hands  of  the  collecting 
officers,  the  Secretary  in  this  year  actually  took  money 
from  the  Treasury  and  deposited  it  in  the  banks.  This 
gave  a  new  significance  to  the  word ' '  deposit. "  It  is  prob- 
able that  the  previous  interpretation  of  the  law  was 
due  not  so  much  to  the  actual  prohibition  of  the  transfer 
of  money  from  the  Treasury  to  the  banks  as  to  the  diffi- 
culty of  distinguishing  internal  revenue  from  the  proceeds 
of  customs  in  money  once  covered  into  the  Treasury. 
As  only  the  former  could  be  put  into  the  banks,  it  would 
have  been  unsafe  to  make  any  transfer  when  it  was  im- 
possible to  distinguish  what  part  of  the  money  came  from 
this  source. 

There  was  no  change  in  the  interpretation  of  the  law 
concerning  the  use  of  national  banks  as  depositaries  of 
public  money  imtil  about  1898,  although,  as  we  have 
seen,  Secretary  Fairchild  had  allowed  the  public  deposits 
to  increase,  in  conformity  with  the  interpretation  of  the 
law  followed  by  his  predecessors.     Notwithstanding  his 


National    Monetary     Commission 

explanations,  his  larger  utilization  of  the  banks  raised  a 
good  deal  of  criticism  and  protest.  Under  the  adminis- 
tration of  Secretary  Gage,  however,  the  volume  of  de- 
posits increased  pretty  rapidly,  and  we  have  the  first 
clear  evidence  of  the  adoption  by  the  Treasury  Depart- 
ment of  the  policy  of  accumulating  a  volume  of  deposits 
determined  by  the  state  of  the  money  rnarket.  The  ma- 
chinery which  had  been  used  as  a  means  of  relieving  strin- 
gencies was  now  to  be  made  a  continuous  regulator  of 
the  money  market  and  the  rate  of  discount. 

In  1898  Secretary  Gage  prepaid  interest  and  redeemed 
bonds  and  so  relieved  the  money  market,  while  at  the 
same  time  he  allowed  the  deposits  in  the  banks  to  rise  to 
$95,000,000.  The  next  year  he  increased  them  to 
$111,000,000,  nearly  twice  as  much  as  the  pubHc  had 
criticised  Secretary  Fairchild  for  making  only  a  few 
years  before.  Secretary  Fairchild  had  limited  the 
amount  in  any  one  bank  to  $1,000,000,  but  in  the  year 
mentioned  Secretary  Gage  allowed  something  over 
$15,500,000  to  accumulate  on  deposit  in  the  National 
City  Bank  at  one  time,  and  more  than  $4,500,000  in  the 
Hanover  National  Bank  of  the  same  city.  Secretary 
Gage  did  not,  indeed,  escape  criticism  for  these  increas- 
ing deposits,  and  he  was  accused  of  showing  favoritism 
to  the  banks  just  mentioned.'^  In  reply  to  a  congres- 
sional inquiry  on  this  point,  however,  he  succeeded  in 
satisfying  Congress  that  he  had  been  impartial. 

The  law  was  amended  by  the  act  of  June  6,  1900,* 
authorizing  the  Secretary  of  the  Treasury  to  designate 

a  See  article  "The  Partial  Responsibility  of  Secretaries  Gage  and  Shaw 
for  the  Crisis  of  1907,"  by  A.  P.  Andrew,  Bankers'  Mag.,  76:  493  ff. 
6  U.  S.  Stats.  L.,  56th  Cong.,  ist  sess.,  797  :  658. 


Independent   Treasury  of  the   United   States 

depositary  banks  in  the  Philippine  Islands,  Porto  Rico, 
and  in  Cuba,  while  occupied  by  the  United  States. 
Whereas  bank  depositaries  on  the  continent  proper  were 
required  by  the  old  law  to  secure  their  deposits  by  "  United 
States  bonds  and  otherwise,"  the  meaning  of  which  we 
shall  presently  discuss,  these  insular  depositaries  were 
required  to  secure  their  deposits  with  United  States 
bonds  only  to  an  amount  not  less  than  the  deposits. 

One  other  point  in  the  development  of  the  use  of  banks 
as  depositaries  is  worthy  of  notice.  According  to  an  act 
of  March  3,  1901,'^  the  Secretary  is  required  to  "  distribute 
the  deposits  herein  provided  for,  so  far  as  practicable, 
equitably  between  different  States  and  sections."  This  is 
a  reflection  of  the  demand  from  banks  in  different  sections 
of  the  country  that  no  special  advantage  shall  be  given  to 
any  party  or  any  bank  by  government  deposits.  There 
is  no  sound  reason  for  the  provision.  It  is  impossible  for 
anyone  to  say  what  is  an  equitable  distribution.  More- 
over, what  will  be  an  equitable  distribution  in  the  sense  of 
affording  profits  to  the  depositary  banks  might  be  a  very 
vicious  distribution  from  the  point  of  view  of  the  general 
welfare.  If  we  are  to  use  depositary  banks  at  all,  the  Sec- 
retary of  the  Treasury  should  be  required  to  utilize  them 
in  such  a  way  as  to  promote  the  general  interest,  without 
regard  to  sectional  prejudice  and  demand.  "When  Secre- 
tary Cortelyou  came  into  the  Treasury  he  found  himself 
flooded  with  applications  from  national  banks  for  deposits 
of  the  public  funds.  *  *  *  It  is  a  difficult  problem 
to  distribute  deposits  properly,  and  the  head  of  the  Treas- 
ury Department  is  under  constant  pressure.     If  there  are 

oU.  S.  Stat.  L.,  34:  1290. 
123 


National    Monetary     Commission 

two  national  banks  in  a  town  and  one  gets  a  deposit  of 
public  money,  the  other,  in  all  probability,  enlists  the 
influence  of  a  Member  of  Congress  or  Senator  to  help  it 
get  a  deposit."*^ 

The  futility  of  the  provision  was  shown  in  1907  by  the 
fact  that  "the  allotment  of  deposits  to  the  banks  selected 
was  made  principally  to  relieve  local  needs  for  currency, 
but  it  was  observed  that  many  of  the  banks  had  their 
allotments  placed  with  their  correspondents  in  New  York 
City,  influenced  no  doubt  by  the  high  rates  of  interest 
prevailing  there.  "^ 

The  Secretary  certainly  should  not  be  subjected  to  any 
such  pressure.  Either  he  should  be  left  entirely  free, 
without  any  legal  restriction,  or  some  definite  plan  of 
distribution  should  be  provided  for  him.  There  is  no 
reason  why  the  public  money  should  be  scattered  all  over 
the  country  simply  to  accommodate  banks  which  want  to 
increase  their  profits;  yet  it  is  difficult  to  devise  a  plan 
that  would  be  likely  to  meet  general  approval.  It  has 
been  suggested  that  the  government  money  should  be 
kept  in  reserve  cities. 

In  1902  the  act  was  further  changed  so  that  the  treas- 
urer of  the  Philippine  Islands  and  banks  in  the  islands 
chartered  by  the  United  States,  or  any  State  thereof,  which 
had  a  capital  of  not  less  than  $2,000,000,  might  be  desig- 
nated as  depositaries  by  the  Secretary  of  War  and  the 
Secretary  of  the  Treasury.  According  to  this  act,  the 
treasurer  of   the  Philippine  Islands  was  not  required  to 

"  Boston  Evening  Transcript,  May  6,  1907. 
6 Finance  Report  (Treasurer)  1908:  161. 


124 


Independent   Treasury  of  the   United   States 

deposit  bonds  as  security,  nor  to  give  other  security  unless 
required  by  the  Secretary  of  War." 

THE    ABANDONMENT    OF    THE    POUCY    OF    INDEPENDENCE, 

Much  as  Secretary  Gage  had  done  to  estabhsh  a  larger 
use  of  the  banks  and  to  aid  the  money  market,  it  was  under 
his  successor,  Secretary  L.  M.  Shaw,  that  the  poHcy  of 
continuous  regulation  of  the  money  market  became  fully 
developed.  Here  it  is  necessary  only  to  narrate  the  suc- 
cessive steps  by  which  the  policy  of  the  law  of  1846  was 
virtually  abandoned.  The  operations  which  led  to  them 
will  be  recounted  later. 

Secretary  Shaw  made  a  new  departure  in  policy  in  two 
respects :  He  accepted  other  than  United  States  bonds  as 
security  for  public  deposits,  and  told  the  banks  that  they 
need  not  keep  a  reserve  against  them.  This  last  provision, 
of  course,  is  open  to  serious  criticism,  for  it  made  av-ailable 
as  a  basis  of  new  loans,  or  for  an  expansion  of  credit,  about 
$100,000,000  in  the  banks  of  New  York  alone.  The  Clear- 
ing House  refused  to  avail  itself  of  the  privilege.  How- 
ever, the  practice  thus  established  by  Mr.  Shaw  was  legal- 
ized^ by  Congress  in  1908. 

On  August  27,  1903,  however,  Mr.  Shaw  departed  from 
the  policy  of  allowing  public  money  simply  to  accumulate 
in  the  banks,  and  announced  his  purpose  to  transfer  money 
from  the  Treasury  to  the  banks  in  order  to  prevent  or 
relieve  a  stringency  in  the  market.  He  then  said  that  he 
had  about  $38,000,000  to  assist  the  banks  if  a  panic  came. 

In  1907  what  had  actually  becomxC  a  practice  was  legal- 

«  U.  S.  Stat.  L.,  57th  Cong.,  ist  sess.,  1369:  711. 
6U.  S.Stat.  L.,  35:  552. 


125 


National    Monetary     Commission 

ized  by  the  act  of  March  4,"  amending  the  depositary  sec- 
tion of  the  law  by  providing  that  banks  might  receive  on 
deposit  the  receipts  from  customs.  It  may  fairly  be  said 
that  with  the  passage  of  this  act,  permitting  the  banks  to 
receive  deposits  of  customs  receipts,  the  last  vestige  of 
compulsory  independence  of  the  United  States  Treasury 
as  the  depositary  of  government  revenue  disappeared. 
Under  the  old  law  the  customs  receipts,  more  than  half  of 
the  government  revenue,  could  not  so  be  used.  Since  the 
public  had  become  accustomed  to  expect  the  Secretary 
of  the  Treasury  to  "ease  the  market,"  it  seemed  foolish  to 
continue  to  insist  that  half  the  revenues  of  the  Government 
should  be  unavailable  to  him  for  this  purpose,  while  of 
course  the  original  reason  for  making  an  exception  of  the 
customs  revenues  had  in  a  sense  disappeared.  That 
reason  was  to  make  sure  that  the  receipts  from  the  customs, 
which  had  to  be  in  gold,  got  into  the  hands  of  the  Govern- 
ment rather  than  those  of  the  banks.  As  circumstances 
were  in  1907,  therefore,  there  was  a  good  reason  for  making 
this  change  in  the  law.  Moreover,  it  was  obviously  one 
of  the  steps  toward  the  ultimate  abolition  of  the  inde- 
pendent treasury  and  the  possible  establishment  of  a  cen- 
tral bank  as  the  agent  of  the  Government. 

The  amendment  to  the  law  in  1907  found  the  Treasury, 
however,  poorly  equipped  with  the  machinery  necessary 
to  carry  out  its  provisions.  This  remark  applies,  for  exam- 
ple, to  the  receipt  and  custody  of  the  securities  required 
from  the  banks.  Moreover  the  enlargement  of  the  gov- 
ernment deposits  in  the  banks  emphasized  the  cumber- 

C'  U.  S.  Stat.  L.,  34: 1290;  59th  Cong.,  2d  sess.,  2914. 


126 


Independent   Treasury  of  the    United   States 

someness  of  the  lawful  method  of  getting  the  money  out 
of  the  banks  and  back  into  the  Treasury.*^  The  legal 
method  of  making  payments  is  by  subtreasury  drafts. 
The  Government  can  not  check  on  its  deposits  in  the 
banks  but  must  cover  the  money  back  into  the  sub- 
treasury,  a  process  which  involves  many  complicated 
formalities  in  the  surrender  of  the  securities  deposited  by 
the  banks.  So  many  were  the  difficulties  of  carrying  out 
the  depositary  law,  especially  with  the  provision  included 
in  the  amendment  of  1901  that  the  Secretary  "should 
distribute  the  deposits  herein  provided  for,  so  far  as  prac- 
ticable, equitably  between  the  different  States  and  sec- 
tions,"^ that  the  Secretary  of  the  Treasury,  Mr.  Cortel- 
you,  appointed  a  commission  to  work  out  a  systematic 
plan  relative  to  the  deposits  of  public  money.  The  com- 
mission included  the  United  States  Treasurer,  the  Director 
of  the  Mint,  the  Comptroller  of  the  Currency,  one  represen- 
tative of  the  Division  of  Loans  and  Currency,  and  one  from 
the  Division  of  Public  Moneys. '^  It  seems  that  the  com- 
mission had  several  meetings  and  discussed  the  subject 
pretty  thoroughly,  but  never  made  a  formal  report.  An 
avalanche  of  protests  was  received  from  banks  all  over  the 
country,  which  had,  or  wanted,  pubhc  deposits,  against 
any  plan  which  might  deprive  them  of  this  source  of  gain. 
In  May,  1908,  another  amendment  was  made  to  the 
law,  whereby  all  regular  national  bank  depositaries  are 

o-  Cf.  Boston  Evening  Transcript,  May  7,  1907,  article  on  Government 
Bank  Deposits.  Of  course,  in  those  places  in  which  the  subtreasury  is  a 
member  of  the  clearing  house  the  difficulty  is  less. 

&  Act  of  March  3,  igoi. 

c  See  "Cortelyou  Plans  Reform,"  Boston  Evening  Transcript,  May  6, 
1907. 


127 


National    Monetary     Commission 

required  to  pay  interest  upon  public  deposits  at  the  rate 
of  I  per  cent  per  annum  on  the  average  monthly  amount 
of  the  deposit.  The  rate  of  interest  must  be  uniform 
throughout  the  country.  This  last  provision  is  bad,  for  it 
makes  no  allowance  for  differences  of  rates  in  different 
localities.  The  rate  fixed  is  so  low  that  very  likely  little 
mischief  will  be  done ;  but  if  the  rate  were  higher,  it  might 
easily  happen  that  in  some  places  a  local  stress  would 
make  the  local  rate  of  discount  lower  than  the  interest  to 
be  paid  on  the  public  deposits,  and  in  other  places  higher. 
Thus  we  see  that  the  legislative  provisions  of  recent  years 
emphasize  the  truth  of  what  has  been  said  in  another 
connection,  that  the  only  conditions  under  which  the  pub- 
lic money  should  be  deposited  are  those  of  safety,  con- 
venience, and  reasonable  profit  consistent  therewith. 

It  appears  therefore  that  recent  legislation  has  vir- 
tually destroyed  the  distinction  between  the  subtreasury 
and  the  national  banks  as  places  for  the  depositing  of  pub- 
lic money.  So  far  as  appears  on  the  face  of  the  law,  it 
would  be  proper  for  the  Secretary  of  the  Treasury  to  de- 
posit all  receipts  of  the  Government  in  the  national  banks. 
If  he  had  the  authority  to  check  against  such  deposits 
instead  of  having  to  cover  them  back  into  the  Treasury, 
the  use  of  the  independent  treasury  for  depositary  pur- 
poses would  pass  away.  It  is  not  impossible  that  some 
Secretary  of  the  Treasury  may  take  the  view  that  it  is  not 
forbidden  to  do  this.  If  so,  the  policy  of  the  independ- 
ence of  our  Treasury,  so  far  as  concerns  the  safekeeping 
of  the  public  money,  will  have  passed  away. 

The  number  of  banks  used  as  depositaries  of  public 
money  has  largely  increased  in  the  past  few  years.     Some 

128 


Independent   Treasury  of  the   United   States 

of  them  are  regular  depositaries  and  some  special  or  tem- 
porary. For  example,  on  September  30,  1909,  there  were 
207  regular  and  974  special  depositaries."  The  use  of  the 
latter  first  became  large  in  the  panic  of  1907.  The  follow- 
ing table  shows  the  number  of  depositary  banks,  and  the 
receipts  and  balances  of  bank  deposits,  from  the  beginning 
of  the  national-banking  system.  ^ 


Date. 


1864. 
i86s. 
1866. 
1867. 
i868. 
1869. 
1870. 
1871. 
1872. 
1873. 
1874. 
187s. 
1876. 
1877. 
1878. 
1879. 


1882. 
1883. 
1884. 
1885. 
1886. 
1887. 


1890. 
1891. 
1892. 
1893- 
1894- 
1895- 


Deposi- 
tary- 
banks. 


«  Finance  Report, 
*  Finance  Report, 


204 
330 
382 
38s 
370 
276 
148 
IS9 
163 
IS8 
154 
MS 
143 
1 45 
124 
127 
131 
130 
134 
140 
13s 
132 
160 
200 
290 
270 

205 

i8s 
159 

160 
iSS 

160 

1909:  2 

232ff. 


Bonds  to  se- 
cure deposits. 


530,009,  750 
32,  707,  soo 

38,  177,500 

39.  177.950 
38,517,950 
25,423,350 

16,  072,  500 
15.536,500 
15.329.  000 
IS, 210, 000 
15.  390,  200 
14,  S47,  200 
I4i  578,  000 
15.377.000 
13. 858, 000 
14,  421,  400 

14,  777,  000 

15.  295,500 
15. 925, 000 
17, 116, 000 

17,  060,  000 
17,  607,  000 
19, 659, 900 
26,  485,500 
56, 128, 000 
45,  222,  000 
29, 713, 000 
26,349.  500 
IS,  852,  000 
IS,  247,  000 

14.  736,  000 

15,  278, 000 


Receipts. 


S153, 
987, 
497, 
351. 
225, 
los. 
120, 
99. 
106, 
169, 
91, 
98, 
97, 
106, 
99. 
109, 
119, 
131. 
143. 
I45> 
129, 
119. 
123. 
128, 
132, 
139. 
147. 
152, 
159, 
166, 
147. 
169, 


395. 108. 71 
564,639.  14 
566,  676.  42 
737,083.83 
244,  144.  75 
160,573.67 
084,  041.  79 
299,840.8s 
104,855. 16 
602,  743. 98 
108, 846. 70 
228, 249.53 
402,  227.57 
470, 261 . 22 
781,053.  48 
397,525.67 
493,  171-94 
820,  002.  20 
261,541.  41 
974,  256.86 
100,  449-35 
056,058.94 
592,  221.  68 
482,  769.  20 
591,946.  77 
316,  214.  49 
761,566.81 
389.837-  70 
380, 415- 47 
257,566.  29 
326,  916.  13 
440,  435. 46 


Balances  end  of 
fiscal  year. 


980,  756.39 
066,  186.  19 
124,  171.  54 
904,  930.  78 
779,  797.62 
597.927.34 
206,  180.  34 
919.  745-59 
501,595.08 
233.551- II 
435.966.69 
562,  679.  52 
520,  194-  76 
299. 999- 28 
928,  268.56 
033,840.  24 
771.  233-90 
704.830.83 
381,  712.90 
803,381. 79 
10,488,827.63 
10,  770,579.  96 
13,  822,  070.  80 
18,975,315.  41 
54,698,  728.36 
43,090,  750.53 
26,  779,  703.32 
21.399.  689.  16 
10,  450,  130.  oi 
9,  962,  526.  00 
10,  423,  767.  61 
10, 978, 505. 80 


7, 

7, 

II. 

7. 

7. 

46, 

208, 

7. 

8. 

9. 


34ff. 

Cf .  table  of  deposits  for  years  preceding,  on  p.  8i. 


41969°  — 10- 


129 


National    Monetary     Commission 


Date. 

Deposi- 
tary- 
banks. 

Bonds  to  se- 
cure deposits. 

Receipts. 

Balance  end  of 
fiscal  year. 

1896 

160 

168 

172 

357 

442 

448 

577 

713 

842 

837 

928 

1,255 

1,436 

1,414 

$i6, 928, 000 
16,930,  500 
30,851,  500 
78,564,540 
107,  253,580 
105, 765, 450 
124,  718,  650 
152,852,020 
112,902,550 

80,  404,  950 
95,575.725 

193,  244,052 
180, 459, 419 

81,  244,  071 

$181, 70s. 917. 74 
149,306,649.  29 
207, 178, 119. 61 
283,  276, 222. 20 
303,903.655.56 
313,373. 160.38 
281,  234,091.  57 
244,947,528.  71 
251,970,862.51 
251.255.327.39 
267,418,788.43 
313,824,  771.  09 
293,869,  490.31 
300,924,352.92 

$11,  415.474.  42 
12,  162,  158.  OS 
33.  843,  700.  81 

1897 

1898 

70,  295,326.94 

92,621,371.  72 

93,442,683.09 

117,  141.564.  13 

140, 001, 016. 70 

104,  459.638.  45 

64,  803,  466.  30 

80,731,058.0s 

166,  803,  951.  96 

147.692,036.  79 

60,  427,  525.69 

The  table  given  is  compiled  from  tables  50,  52,  and  54 
in  the  report  of  the  United  States  Treasurer  for  1909 
and  corresponding  tables  in  other  reports.  The  balances 
are  those  on  deposit  at  the  close  of  the  fiscal  year.  It 
should  be  noted,  however,  that  these  balances  differ  from 
the  balances  given  in  Table  54  of  the  Treasurer's  report 
for  1909.*^ 

A  study  of  the  columns  giving  the  number  of  depositary 
banks  since   1864  shows,  as  has  been  already  stated,  a 

o  The  explanation  of  the  difference,  kindly  given  by  the  United  States 
Treasurer   is  as  follows: 

Table  54,  on  page  240  of  the  report,  is  an  aggregated  statement  of  ledger 
balances,  including  the  unavailable  funds  and  the  deposits  in  the  treasury 
of  the  Philippine  Islands.  The  balances  standing  to  the  credit  of  the  Treas- 
urer of  the  United  States  with  the  depositaries,  when  brought  together, 
verify  the  amount  stated  in  the  table  referred  to,  as  follows: 

In  national-bank  depositaries  (p.  19) $60,  427,  525.  69 

In  treasury  of  Philippine  Islands  (p.  19) 957,  628.  34 

Unavailable  balances  in  banks  (p.  188) 214,  761.  38 

Total 61,  599,  915.  41 

Less  warrants  outstanding  (p.  19) i,  432,  027.  18 

Balance  as  stated  in  Table  54  (p.  240) 60,  167,  888.  23 

130 


Independent   Treasury  of  the   United  States 

very  great  variation,  indicating  the  changeableness  of 
policy.  In  1867  the  number  of  depositary  banks  rose  to 
385;  after  this  it  fell  rapidly  to  the  low  point  of  127  in 
1879.  It  should  be  noted,  however,  that  the  balance  in 
the  latter  case,  although  the  number  of  banks  was  smaller, 
was  nearly  nine  times  as  much  in  the  former-mentioned 
year.  From  1879  the  number  again  increased  to  290  on 
June  30,  1888.  The  number  again  fell  to  155  in  1894,  ^^^ 
then  rose  each  year  until  in  1904  it  became  842.  The 
following  year  the  number  fell  to  837  and  has  steadily 
increased  since,  the  numbers  for  the  four  following  years 
being,  respectively,  928,   1,255,   1,436,  and  1,414. 

As  to  the  total  receipts  in  recent  years,  the  sum  in  1890 
was  $147,761,566;  the  amount  increased  every  year  with 
two  exceptions,  1894  ^"^^  1897,  until  it  reached  the  high 
total  of  $313,373,160  in  1901.  It  was  less  during  each 
of  the  following  five  years,  but  rose  again  in  1907  to 
$313,824,771,  fell  to  $293,869,490  in  1908,  and  became 
$300,924,352  in  the  fiscal  year  of  1909. 

The  balances  on  hand  in  the  depositary  banks  at  the 
close  of  the  fiscal  years  also  show  great  differences.  The 
balances  are  significant  because  they  throw  some  light 
on  the  policy  of  the  department  as  to  the  amount  of 
money  left  in  the  control  of  the  banks.  The  balance  in 
1893  was  $9,962,000.  It  did  not  vary  much  for  four 
years,  but  took  a  sudden  leap  in  1898  to  over  $33,000,000. 
In  1 899  the  balance  at  the  close  of  the  fiscal  year  was  more 
than  double  that  of  the  preceding  year  and  increased 
steadily  until  in  1903  it  was  $140,000,000.  In  each  of 
the  two  following  years  there  was  a  large  decrease, 
but  in   1907  the  balance  rose  again  to  the  large  sum  of 

131 


National    Monetary     C  ommis  s  io 


n 


$167,000,000.  In  1908  it  was  $147,692,000  and  on  June 
30,   1909  it  was  $60,427,525. 

The  warrants  paid  by  the  banks  in  1890  were  $20,548,- 
812.  They  remained  within  a  miUion  or  two  of  this  figure 
until  1902,  and  have  since  increased  until  in  1909  they 
aggregated  over  $79,000,000. 

As  to  the  amount  transferred  to  the  banks  from  the 
Treasury,  it  never  rose  to  as  high  a  figure  as  $100,000,000 
before  1899,  but  in  that  year  it  suddenly  jumped  to 
$226,173,117  from  $82,971,223.  Two  years  later  it  had 
fallen  to  $125,000,000.  In  1903  it  became  $201,000,000, 
in  1906  $233,000,000,  in  1907  $349,000,000,  in  1908 
$297,000,000,  and  in   1909  $192,000,000. 

SECURITY    FOR   DEPOSITS   OF    PUBLIC   MONEY. 

According  to  the  law  passed  April  2,  1864,  providing 
for  the  use  of  national  banks  as  depositaries  of  govern- 
ment revenue,  it  was  provided  that  such  deposits  should 
be  secured  by  United  States  bonds  and  otherwise.  The 
necessity  has  never  arisen  for  courts  to  pass  upon  the 
meaning  of  the  words  "and  otherwise."  From  a  study 
of  the  debates  of  Congress  it  appears  that  the  words  were 
intended  to  mean  a  personal  bond.  The  words  were 
inserted  as  an  amendment  to  the  original  bill  by  Mr. 
Hooper,  of  IMassachusetts,  On  inquiry  on  the  floor  of 
the  House  as  to  the  meaning  intended  by  the  amend- 
ment, Mr.  Hooper  replied:  "By  the  present  arrangement 
or  rules  of  the  Department,  the  Secretary  requires  a  per- 
sonal  bond   in   addition  to   a  deposit   of  United  States 


132 


Independent   Treasury  of  the   United  States 

stock,  and  it  was  to  cover  that  point  that  I  offered  the 
amendment."  " 

It  does  not  seem  to  have  occurred  to  any  Secretary  of 
the  Treasury  that  the  security  to  be  accepted  for  a  deposit 
of  pubHc  money  in  the  banks  could  be  other  than  United 
States  bonds  until  the  time  of  Secretary  Leslie  M.  Shaw. 
He  ruled  that  other  kinds  of  securities  might  be  accepted, 
so  that  United  States  bonds  might  be  released  and  become 
the  basis  of  new  note  issues.  This  was  virtually  making 
the  phrase  "United  States  bonds  and  otherwise"  read 
"United  States  bonds  or  otherwise." 

The  action  of  the  Secretary  aroused  much  discussion  and 
criticism,  but  was  defended  on  the  ground  that  the  phrase 
"United  States  bonds  and  otherwise"  is  verbally  capable 
of  that  interpretation.  Against  this  opinion,  however, 
certain  considerations  must  be  set.     These  are: 

1.  The  intention  of  the  framers  of  the  law  clearly  was 
to  restrict  the  bonds  used  to  those  of  the  United  States. 
This  is  evident  from  the  remark  of  the  mover  of  the  amend- 
ment by  which  the  words  "and  otherwise"  were  inserted 
in  the  law. 

2.  The  other  interpretation  reduces  the  phrase  to  ab- 
surdity. If  "United  States  bonds  and  otherwise"  means 
a  mixture  of  United  States  and  other  bonds,  the  Secretary 
could  accept  as  security  for  any  amount  of  deposits  two 
United  States  bonds  of  the  lowest  denomination  and  let 
the  rest  of  the  security  be  in  the  form  of  other  bonds.  If 
it  were  the  intention  of  Congress  to  permit  this,  the  require- 
ment of  United  States  bonds  at  all  is  foolish. 

"  Congressional  Globe,  38th  Cong.,  II  :  1401. 


133 


National     Monetary     Commission 

3.  Every  Secretary  of  the  Treasury  before  Mr.  Shaw 
since  the  passage  of  the  act  under  discussion  has  construed 
the  phrase  in  the  sense  intended  by  Congress.  All  have 
uniformly  refused  to  accept  other  bonds  as  security  for 
public  deposits. 

4.  The  intent  of  Congress  may  be  inferred  also  from  the 
fact  that  it  has  always  refused  to  amend  the  national  bank- 
ing law  so  as  to  permit  the  use  of  other  than  United  States 
bonds  as  security  for  note  issues. <^ 

How  far  we  hav'e  broken  away  from  our  older  practice 
may  be  seen  from  a  letter  of  the  Secretary  of  the  Treasury, 
under  date  of  February  27,  1908,  transmitting  a  response 
to  the  resolution  of  the  House  of  Representatives  as  to 
the  number,  capital,  circulation,  deposits,  etc.,  of  the 
national  banks.''  The  variety  and  character  of  the  bonds 
held  by  the  different  banks  is  remarkable.  Besides  United 
States  securities  we  find  railway,  municipal,  county,  and 
state  bonds. 

The  attitude  of  the  present  administration  of  the  Treas- 
ury on  the  relation  of  the  Government  to  the  banks  may 
be  gathered  from  these  words  of  the  Secretary:  "The 
tendency  to  affiliate  the  subtreasuries  with  the  clearing 
houses  of  their  localities  is,  I  think,  clearly  in  the  right 
direction.  There  seems  to  be  no  good  reason  why  the 
receiving  and  paying  work  of  the  Government  should  not 
be  on  the  lines  of  the  receiving  and  paying  work  of  other 
business  organizations,  and  so  far  as  the  discretion  lies  with 
the  Secretary  of  the  Treasury  I  shall  consider  with  great 

a  Cf.  the  proposals  of  Hon.  M.  A.  Harter,  of  Ohio,  in  bill  5442,  introduced 
in  Congress  February  5,  1892. 

6  House  Ex.  Docs.,  714,  60th  Cong.,  1st  sess. 

134 


Independent   Treasury  of  the    United   States 

interest  suggestions  for  the  adjustment  of  the  ordinary- 
paying  and  receiving  business  of  the  Government  to  the 
convenience  of  the  people. 

"  I  even  hope  for,  and  I  beg  to  suggest  to  the  consider- 
ation of  the  Congress,  a  reconsideration  of  the  methods 
of  the  payment  of  customs  duties  so  that  these  transac- 
tions may  cease  to  be  so  very  inconvenient  and  may  con- 
form themselves  to  the  ordinary  practices  of  business.  The 
spectacle  should  not  be  possible  of  a  detail  from  the  navy 
carrying  $30,000  in  cash  through  the  streets  of  New  York 
from  the  subtreasury  to  the  custom-house  to  pay  duties 
on  navy  importations  and  of  a  return  trip  from  the  cus- 
tom-house by  the  representatives  of  the  collector  back 
to  the  subtreasury  with  this  same  money,  all  because  the 
collector  of  customs  could  not  legally  accept  a  check  of 
the  Navy  Department  upon  the  subtreasury.* 

Under  the  pressure  of  a  growing  deficit,  the  present 
Secretary  was  obliged  in  1908-9  to  recall  a  large  part  of 
the  government  deposits  from  the  banks.  He  says: 
"  In  previous  years  it  was  deemed  advisable  to  restore  ac- 
cumulating revenues  in  the  Treasury  to  the  channels  of 
trade  by  making  direct  deposits  thereof  in  national  banks; 
consequently,  with  tfhe  growth  in  disbursements  in  later 
years  not  equaled  by  the  income,  such  deposits  have  been 
gradually  recalled  to  the  Treasury  as  needed.  The  bal- 
ance in  depositary  banks  to  the  credit  of  the  general  fund 
at  the  beginning  of  the  last  fiscal  year  was  $149,004,924. 
Calls  for  the  return  of  deposits  to  the  Treasury  were  made 
as  follows:  July  2,  1908,  $33,403,120;  November  18,  1908, 

a  Finance  Report,  1909: 13-14. 


135 


National     Monetary     Commission 

$4,864,750;  January  11,  1909,  $24,716,760;  February  4, 
1909,  $28,478,000;  and  June  30,  1909,  $24,954,900.  The 
total  amount  of  these  calls  had  not  been  paid  by  the  close 
of  the  fiscal  year,  but  the  balance  in  banks  to  the  credit 
of  the  general  fund  had  been  reduced  to  $60,427,525.69."  « 
From  all  this  it  appears  that  from  being  a  passive 
agent  in  not  contracting  the  currency  by  simply  allowing 
the  internal  revenue  to  accumulate  in  specified  national 
banks,  the  Treasury  has  become  an  active,  positive,  agent 
by  making  actual  transfers  of  money  once  covered  into 
the  Treasury.  It  has  enlarged  its  power  to  deposit,  and 
has  not  only  accepted  a  larger  variety  of  securities,  but 
allowed  a  larger  volume  of  deposits.  We  have  seen  it 
first  in  a  condition  where  the  deposits  simply  accrued; 
second,  a  condition  in  which  not  only  were  deposits 
allowed  to  accrue,  but  money  once  in  the  treasury  was 
actually  transferred;  third,  adding  to  the  source  of  these 
deposits  by  including  customs  as  well  as  internal  revenue ; 
fourth,  increasing  the  number  of  depositary  banks;  fifth, 
changing  the  character  of  securities,  first  by  the  Secre- 
tary of  the  Treasury,  and  then  by  law;  sixth,  increasing 
the  payment  of  government  obligations  by  bank  war- 
rants. "Thus  we  see  that  in  the  sixty  years  of  its  exist- 
ence, the  independent  treasury  has  become  an  institution 
of  a  very  different  character  from  what  its  creators 
intended.  In  1846  it  was  a  depositary  of  the  pubHc 
moneys,  intended  to  keep  them  safe  from  the  manipu- 
lation of  banks.  In  186 1  it  established  a  permissible 
but  slight  connection  with  the  banks.     In  1903  we  find 

<*  Finance  Report,  1909:  34. 
136 


Independent   Treasury  of  the   United   States 

the  law  interpreted  so  as  to  take  the  money  actually 
already  in  the  Treasury  for  deposit  in  the  banks,  and  from 
then  until  now  we  see  the  independent  treasury  made 
an  active  and  dominating  factor  in  determining  the 
volume  of  money  in  circulation,  in  other  words,  the 
elasticity  of  the  currency.  "'^ 

OPERATIONS  OF  THE  INDEPENDENT  TREASURY  UNDER  THE 
POLICY  OF  REACTION. 

The  fimctions  described  as  gradually  added  to  the 
independent  treasury  in  the  past  ten  years  in  the  efforts 
to  neutralize  its  ill  effects  have  become  a  regularly 
recurring  part  of  the  Treasury  operations.  The  cases 
of  interference  due  to  the  occurrence  of  crises  will  be 
described  in  connection  with  that  topic.  A  sketch  of 
the  ordinary  Treasury  operations  for  the  past  few  years 
will  bring  out  strongly  the  other  services  described. 

For  five  or  six  years  after  1890,  as  a  result  of  the  inde- 
pendence of  the  Treasury  in  creating  its  own  circulating 
medium  for  some  years  previously,  the  monetary  affairs 
of  the  country  were  so  deranged  that  its  independent 
method  of  keeping  the  public  money  was  of  secondary 
importance  and  interest.  The  alternate  intake  and 
output  of  money  from  circulation  continued,  indeed,  as 
before.  But  their  influence  was  lessened  because  of 
deficits  in  revenue  and  the  increasing  use  of  depositary 
banks.  The  operations  connected  with  the  currency  can 
be  described  more  appropriately  in  discussing  the  panic 
of  1893. 

a  Publ.  Amer.  Econ.  Assoc,  3d  series,   9:  i:  204. 


137 


National     M 0  7i  et ar y     Commission 

With  the  advent  of  Secretary  Gage  into  the  Treasury 
Department  we  find  the  beginning  of  a  period  of  positive 
reaction  from  the  policy  of  independence  and  a  definite 
attempt  toward  closer  affihation  with  the  banks.  In 
the  matter  of  keeping  the  public  money,  Secretary  Gage 
inaugurated  no  new  policy,  but  extended  existing  prac- 
tices. In  the  matter  of  Treasury  issues  he  stood  for 
further  advance  in  the  direction  of  sound  currency,  which 
had  been  taken  with  the  repeal  of  the  silver  purchase  law. 
His  object  was  largely  attained  by  the  action  of  Congress 
in  passing  the  currency  law  of  1900. 

To  Mr.  Gage's  successor,  Secretary  Leslie  M.  Shaw,  is 
to  be  ascribed  the  wide  departure  from  established  policy 
and  practice,  which,  although  afterwards  sanctioned  by 
act  of  Congress,  invited  sharp  criticism  from  business 
men  and  students  of  financial  affairs.  With  the  stoppage 
of  constant  inflation  from  silver  coinage,  with  the  recur- 
rence of  an  "endless  chain"  redemption  of  greenbacks 
prevented  by  the  law  of  1900,  and  with  the  return  of  a 
surplus  in  the  revenue  of  the  Government,  public  atten- 
tion was  turned  once  more  to  the  evils  of  the  other  phase 
of  the  independence  of  the  Treasury,  that  concerned  with 
the  safe-keeping  of  the  public  money.  The  condition 
of  the  bank  reserves  and  the  state  of  the  money  market 
became  matters  of  concern  to  the  Secretary  and  started 
him  in  the  policy  of  closer  union  of  bank  and  Treasury, 
which,  more  than  anything  else,  distinguishes  his  career 
from  that  of  any  of  his  predecessors  since  the  passage  of 
the  act  of  August  5,  1846. 

During  the  summer  of  1902,  the  bank  reserves,  contrary 
to    custom,  showed    almost    continuous    decrease.     The 

138 


Independent   Treasury  of  the    United   States 

Secretary  of  the  Treasury  consequently  anticipated 
trouble  in  the  fall  and  prepared  to  meet  it.  He  ordered 
as  many  bank  notes  as  could  be  engraved  to  be  prepared 
in  advance,  so  that  they  would  be  ready  for  immediate 
distribution  on  the  call  of  the  banks,  and  thereby  avoid 
the  delay  in  issuing  them  to  which  the  banks  had  been 
previously  subjected  in  times  of  sudden  stringency  and 
increased  demand  for  circulation.  In  order  to  induce 
the  banks  to  take  out  additional  circulation  the  Secretary 
about  this  time  also  offered  to  accept  other  bonds  than 
those  of  the  United  States  as  security  for  deposits. 

A  third  preparatory  move  was  the  announcement  that 
the  Secretary  would  anticipate  the  payment  of  interest 
due  in  November  on  the  public  debt.  He  announced, 
in  the  fourth  place,  an  increase  in  the  deposits  of  public 
money  in  the  banks,  and  finally  gave  out  the  information 
that  he  would  not  put  into  liquidation  banks  which  failed 
to  maintain  reserves  against  public  deposits.  This  was 
granting  permission  to  the  banks  so  to  interpret  the  law 
requiring  a  reserve  against  their  deposits  as  to  exclude 
public  money  from  counting  as  deposits  in  the  sense,  of 
the  law.  This  practice,  which  at  this  time  was  based 
entirely  upon  what  the  Secretary  supposed  the  law  gave 
him  permission  to  do,  was  legalized  six  years  later.  The 
Secretary  of  the  Treasury  seemed  to  believe  that  upon 
him  was  placed  the  burden  of  regulating  the  money 
market  in  the  interests  of  what  he  regarded  as  the  public 
welfare. 

In  the  following  year,  1903,  the  Secretary,  being  of  the 
opinion  that  the  deposits  of  current  internal  revenue  and 
miscellaneous  receipts  in  the  banks  were  insufficient  to  pre- 

139 


National     Monetary     Commission 

vent  the  possibility  of  a  serious  stringency,  took  another 
radical  step.  Of  course,  the  daily  or  weekly  receipt  of  the 
proceeds  of  the  internal  revenue  by  the  banks  enabled 
them  to  increase  their  discounts,  and  of  this  opportunity 
they  took  advantage.  The  receipt  of  this  public  money, 
therefore,  did  not  necessarily  put  them  in  any  stronger 
position  to  withstand  a  shock.  Accordingly  the  Secre- 
tary ordered  the  receipts  from  internal  revenue  and  mis- 
cellaneous sources  to  be  accumulated  in  a  separate  fund 
"so  as  to  be  prepared  in  case  of  an  emergency  to  grant 
prompt  relief  by  large  deposits."  «  He  was  preparing  to 
transfer  to  the  banks  money  already  covered  into  the 
Treasury.  By  the  means  thus  far  described,  and  also  by 
bond  purchases,  in  the  neighborhood  of  $27,000,000,  were 
"  restored  to  the  channels  of  trade  "  in  the  fall  of  1903. 

One  new  feature  presented  in  the  year  1904-5  was  a  de- 
crease in  the  national  revenue.  The  year  closed  with  a 
deficit  of  $23,000,000.  Confronted  w4th  this  deficit  the 
Secretary  found  it  necessary  to  strengthen  his  position 
by  reducing  the  deposits  with  the  banks.  He  withdrew 
$50,000,000  in  the  summer,  and  from  this  and  other 
causes  the  surplus  reserve  of  the  New  York  banks  fell  to 
less  than  $7,000,000.  The  benefits  received  by  previous 
actions  were  being  oft'set  by  the  present  one. 

In  1906  was  announced  Secretary  Shaw's  much  criti- 
cised plan  of  depositing  in  banks  against  gold  imports. 
He  is  charged  with  showing  partiality  in  this  move  to  one 
of  the  larger  banks  of  New  York  City.*     The  plan  was  to 

«  Finance  Report,  1906,  38. 

&  A.  Piatt  Andrew:  The  Partial  Responsibility  of  Secretaries  Gage  and 
Shaw  for  the  Crisis  of  1907;  Bankers'  Magazine,  76:493. 


140 


Independent   Treasury  of  the    United   States 

make  deposits  in  any  bank  that  would  import  gold  equal 
to  the  amount  of  gold  engaged,  the  deposits  to  be  returned 
when  the  gold  arrived.  In  this  way,  he  tells  us,  approxi- 
mately $50,000,000  of  gold  were  brought  from  abroad. 
It  is  said  that  permission  to  do  this  was  given  to  the 
National  City  Bank  of  New  York  two  weeks  before  public 
announcement  of  the  policy  was  made.  In  his  report  for 
1906,  Secretary  Shaw  defends  the  policy  on  the  ground 
that  it  had  caused  the  importation  of  gold  without  ex- 
pense to  the  Government  and  with  great  benefit,  although 
without  profit,  to  the  banks.  This  is  a  matter  about 
which  there  is  room  for  a  difference  of  opinion. 

This  was  regarded  by  many  people  as  an  extraordinary 
action.  A  somewhat  similar  proposal  was  made  to  the 
Secretary  of  the  Treasury  in  1873.  It  is  interesting  to 
compare  his  action  with  that  of  Secretary  Shaw  as  con- 
trasting the  different  views  of  the  two  men  as  to  the.  scope 
of  their  discretion  in  their  interpretation  of  the  law.  In 
September,  1873,  the  New  York  Produce  Exchange  asked 
the  Secretary  of  the  Treasury  "that  currency  be  imme- 
diately issued  to  banks  or  bankers,  upon  satisfactory  evi- 
dence that  gold  has  been  placed  upon  special  deposit  in 
the  bank  of  England,  by  their  correspondents  in  London, 
to  the  credit  of  the  United  States,  to  be  used  solely  in 
purchasing  commercial  bills  of  exchange."  The  Secretary 
replied: 

"  If  your  object  is  to  induce  the  Treasury  Department 
to  loan  United  States  notes  to  banks  in  New  York  upon 
the  pledge  and  deposit  in  London  of  gold,  it  is  asking  the 
Secretary  of  the  Treasury  to  loan  the  money  of  the  United 


141 


National    Monetary     Commission 

States  upon  collateral  security  for  which  there  is  no  author- 
ity in  law.  If  the  Secretary  of  the  Treasury  can  loan 
notes  upon  a  pledge  of  coin  he  can  loan  them  upon  a 
pledge  of  other  property  in  his  discretion,  as  he  has  re- 
cently been  requested  to  do,  which  would  be  an  extraor- 
dinary power  as  well  as  a  most  dangerous  business  to  en- 
gage in,  and  which  my  judgment  would  deter  me  from 
undertaking,  as  the  Secretary  of  the  Treasury,  even  if  by 
any  stretch  of  construction  I  might  not  find  it  absolutely 
prohibited  by  law."« 

Another  remarkable  operation  for  which  Secretary  Shaw 
was  responsible  in  1906,  was  the  reduction  of  deposits  of 
public  money  secured  by  other  than  United  States  bonds, 
and  an  increase  of  deposits  secured  by  United  States 
bonds,  in  order  to  make  the  latter  bonds  scarce  and  push 
up  the  price  to  furnish  a  better  market  for  the  sale  of  the 
new  Panama  bonds.  Under  the  circumstances,  the  Pan- 
ama bonds  sold  at  1.0436  as  against  a  market  price  of 
1.0325  for  2  per  cent  nineteen-year  consols.  To  quote  the 
Secretary's  own  words:  "In  other  words,  a  market  for 
government  bonds  was  created  which  stimulated  their 
price.  "^  We  may  doubt  whether  the  cause  assigned  for  the 
rise  in  the  price  of  bonds  at  the  time  is  the  true  one.  But 
even  if  not,  one  is  amazed  at  the  opportunity  for  manipula- 
tion of  the  market  afforded  by  this  mode  of  procedure.  It 
was  virtually  an  attempt  to  corner  the  market  for  existing 
United  States  bonds  in  order  to  get  a  higher  price  for  the 
new  debt. 

The  fall  of  1906  brought  the  expected  stringency,  and 
the  Secretary  took  new  steps  in  the  application  of  his 

0  Finance  Report,  1873,  XIII  b  Finance  Report,  1906:  40. 

142 


Independent   Treasury  of  the   United   States 

policy  to  care  for  the  business  interests  of  the  country. 
He  again  made  deposits  against  gold  imports  to  the 
amount  of  fifty  millions;  he  accepted  other  than  United 
States  bonds  as  security  for  deposits  of  public  money, 
to  the  amount  of  $18,000,000,  on  the  same  condition 
as  before,  that  the  extra  circulation  based  on  the  re- 
leased bonds  be  taken  out  by  the  banks  and  be  retired 
not  later  than  the  following  spring  or  summer.  He  was 
looking  forward  to  a  contraction  of  the  currency  at  a 
time  when  he  thought  it  ought  to  be  contracted,  just  as 
he  was  providing  for  its  expansion  at  the  season  when 
he  thought  that  necessary. 

But  the  limits  of  the  Secretary's  beneficent  policy  were 
not  yet  reached.  Not  content  with  keeping,  or  trying 
to  keep,  the  money  market  of  our  own  country  in  stable 
equilibrium,  he  felt  it  incumbent  upon  himself  to  do 
what  he  could  to  help  the  rest  of  the  world  on  the  same 
matter.  He  declared  that  no  government  operations 
in  this  country  should  be  permitted  to  interfere  with 
prosperity  either  at  home  or  abroad,'^  and  then  went  on  as 
follows:  "The  Treasury  now  holds  (November  20)  in 
its  own  vaults  a  working  balance  of  $78,000,000,  as  much 
as  can  possibly  be  spared  of  which  will  be  deposited  if 
business  conditions  require  it,  though  it  become  neces- 
sary to  pay  current  expenses  of  the  Government  with 
checks  on  depositary  banks.''  The  money  of  the  country 
belongs  to  the  people,  and  Treasury  operations  must  be 

o  Finance  Report,  1906  :  40. 

^  The  authority  for  so  doing,  it  is  alleged,  is  found  in  the  general  powers 
of  the  Secretary  and  the  Treasurer.  In  the  writer's  opinion  this  assumed 
authority  is  inferred,  rather  than  specific,  like  the  authority  assumed  by 
Secretary  Shaw  to  transfer  money  from  a  subtreasury  to  a  bank. 

143 


National    Monetary     Commission 

made  subordinate  to  the  business  interests  of  the  coun- 
try."'* This  is  remarkable  language  for  an  officer  sworn 
to  uphold  the  law.  Such  an  interpretation  of  the  law 
would  give  to  the  officer  in  question  discretion  of  more 
far-reaching  consequence  to  the  welfare  of  the  business 
interests  of  the  country  than  most  of  us  would  care  to 
intrust  to  one  man.  But  the  Secretary  of  the  Treasury 
had  the  courage  of  his  convictions,  and  insisted  in  his 
report  that  it  would  be  better  squarely  to  put  such  re- 
sponsibility upon  the  Secretary.^  His  views  can  best 
be  given  in  his  own  words.  He  realized,  as  he  remarked, 
that  ' '  the  Treasury  has  always  been  a  bloody  angle  of 
criticism  of  the  administration,"  and  felt  it  necessary  to 
explain  and  defend  the  steps  he  had  taken  and  his  own 
general  policy.  "The  Government  quarantines  against 
yellow  fever;  it  spends  millions  to  protect  the  people 
against  unwholesome  food;  it  inspects  banks  in  the  in- 
terests of  depositors;  it  has  thought  of  every  means  to 
safeguard  the  people  against  disaster  of  various  kinds. 
*  *  *  Beheving  it  to  be  the  duty  of  the  Government 
also  to  protect  the  people  against  financial  panics,  which, 
in  this  country,  have  caused  more  mental  and  more  physi- 
cal suffering  than  all  the  plagues  known  to  man  *  *  * 
the  Secretary  of  the  Treasury  undertook  the  task  of  mak- 
ing some  slight  provision  for  the  inevitable."  After 
paying  his  compHments  to  the  people  who  write  articles 
without  studying  actual  conditions,  and  giving  a  graphic 
description  of  the  blockade  of  traffic  in  the  fall,  through 
lack  of  adequate  transportation  facihties,  he  tells  us  that 

a  Finance  Report,  1906  :  40.  &  Finance  Report,  1906  :  49. 


144 


Independent   Treasury  of  the   United   States 

he  deemed  it  wise  to  relieve  the  blockade  by  importing 
gold.  It  was  for  this  reason  that  he  made  deposits 
against  importation,  as  already  described.  But  it  is 
not  necessary  to  expatiate  upon  the  radical  character 
of  the  policy  of  the  Secretary  at  this  time.  Suffice  it  to 
say  that  evidently  he  acted  for  what  he  thought  the  best 
business  interests  of  the  country  in  broadening  the  inter- 
pretation of  the  scope  of  the  Secretary's  duties  in  connec- 
tion with  the  money  market.  It  is  worthy  of  notice  that 
some  of  the  precedents  which  he  established  were  so 
strongly  approved  by  the  business  interests  he  favored 
that  later  they  were  adopted  into  law. 

The  year  1906  showed  a  surplus  of  $25,669,322  on 
June  30,  as  contrasted  with  a  deficit  of  $23,004,228  for 
the  preceding  fiscal  year.  Accordingly  "national-bank 
depositaries  were  utilized  during  the  fiscal  year  as  a 
medium  through  which  the  excessive  accumulation  of 
money  in  the  Treasury  was  restored  to  the  channels  of 
trade." 

On  March  4,  1907,  Mr.  Cortelyou  became  Secretary  of 
the  Treasury.  He  came  into  his  office  at  a  difficult  time, 
and  it  is  not  surprising  that  he  followed  in  the  steps  of 
his  predecessors.  Indeed,  it  is  doubtful  whether,  under 
the  conditions  that  prevailed,  he  could  have  done  other- 
wise. The  policy  of  the  Treasury  Department  had  been 
fixed,  and  conditions  of  business  were  such  that  a 
departure  from  that  policy  would  have  made  matters 
worse;  hence,  whether  or  not  the  incoming  Secretary 
believed  in  the  established  policy,  his  hands  were  tied. 
Accordingly,  he  followed  his  immediate  predecessors  in 

41969°— 10 10  145 


National    Monetary     C  ommis  s  io 


n 


increasing  the  bank- deposit  accounts  because  of  a  strin- 
gency that  arose  from  depreciation  in  the  money  market. 
He  accepted  railroad  bonds  as  security;  he  anticipated 
interest  payments;  and  he  redeemed  bonds.  All  these 
measures,  however,  failed  to  reheve  the  situation  suffi- 
ciently, in  his  opinion.  On  August  23  he  annoimced  his 
plan  of  depositing  the  public  money  each  week  for  five 
successive  weeks,  and  declared  that  he  would  not  give 
out  any  information  as  to  the  amount  or  distribution  of 
these  deposits.  Under  this  deposit  policy  the  aggregate 
of  public  money  in  the  banks  by  October  reached  the 
great  sum  of  $176,000,000.  Within  three  days  the  Secre- 
tary deposited  more  than  $31,000,000  in  the  New  York 
banks  alone,  and  the  total  deposits  throughout  the  coun- 
try rose  first  to  $209,000,000  and  later  to  $242,000,000. 
The  features  and  the  effects  of  these  measures  are  con- 
sidered in  the  discussion  of  the  panic  of  iqo7. 


146 


Chapter  VI. — ^The  Infi^uence  of  the  Ordinary  Opera- 
tions OP  the  Independent  Treasury  System  on 
Business. 

THE   DIFFERENT   PERIODS   OF   SUBTREASURY   ACTION. 

The  most  important  phase  of  the  operation  of  the  inde- 
pendent treasury  is  its  influence  on  the  business  of  the 
country  in  ordinary  times.  During  the  early  years  of  the 
operation  of  the  system  the  annual  receipts  and  expendi- 
tures of  the  Government  were  small  compared  with  what 
they  have  been  in  recent  years  and,  moreover,  were  ap- 
proximately equal.  As  the  outgo  virtually  equaled  the 
income  and  was  fairly  equable  in  its  flow,  there  appeared 
but  little  of  the  evil  of  the  disturbance  of  the  money  market 
due  to  the  irregular  locking  up  and  disbursement  of  the 
medium  of  circulation.  There  was  no  great  surplus  such 
as  for  a  good  many  years  since  has  been  a  permanent  fea- 
ture in  the  financial  operations  of  the  country.  This  is  an 
important  consideration.  When  the  system  was  estab- 
lished the  receipts  of  the  Government  were  about 
$1,000,000  a  week.  So  unimportant  was  the  influence  of 
the  fiscal  operations  of  the  Government  for  some  years 
after  1846  that,  as  Professor  Sumner  remarks,'^  "the 
bankers  and  merchants  could  afford  to  laugh  at  the  insig- 
nificance of  the  government  on  their  arena."  To-day, 
however,  conditions  are  very  different.  The  Treasury  is 
the  greatest  single  handler  of  money  in  the  country,  and 

«  History  of  American  Currency:  167. 
147 


National    Monetary     Commission 

its  annual  revenue  frequently  runs  much  beyond  its 
expenditure. 

This  is  an  important  consideration.  For  the  influence 
exerted,  on  the  amount  of  the  circulating  medium,  for 
example,  by  a  government  which  keeps  its  own  money 
may  be  very  different  under  a  policy  of  surplus  financier- 
ing from  what  would  prevail  when  income  and  outgo  are 
nearly  equal.  Certainly  there  would  be  an  element  in  the 
situation  due  to  the  possible  prolonged  withdrawal  of 
money  from  circulation  in  the  one  case  which  would  not 
exist  in  the  other. 

For  another  considerable  period  of  the  existence  of  the 
subtreasury  system  the  country  was  under  a  regime  of 
fiat  paper  money,  issued  under  circumstances  which  prac- 
tically involved  a  departure  from  the  doctrine  of  complete 
divorce  of  bank  and  state,  of  the  advantages  of  which  so 
much  was  said  at  the  time  when  the  subtreasury  system 
was  established.  During  this  period  gold  was  not  part  of 
the  money  of  exchange  of  the  country,  nor,  indeed,  of  the 
bank  reserves.  Yet  the  law  of  the  land  required  it  to  be 
collected  in  payment  of  customs  dues  and,  therefore, 
caused  its  accumulation  at  times  in  the  vaults  of  the  sub- 
treasury.  The  result  was  the  establishment  of  a  current 
of  disturbances  in  the  gold  market  independent  of  any 
influence  which  the  system  may  have  been  exerting  at 
the  same  time  on  the  currency  of  the  country.  During 
this  period  there  were,  therefore,  two  possible  areas  of  dis- 
turbance of  business  through  subtreasury  action,  one 
exerted  through  its  operations  on  gold  and  the  other 
through  its  operations  on  the  paper  currency. 


148 


Independent   Treasury  of  the   United  States 

Therefore,  although  during  both  the  period  of  the 
civil  war  and  the  period  of  paper  inflation  that  followed  it, 
the  Government  was  obliged  to  depart  from  its  policy  of 
the  complete  separation  of  its  operations  from  those  of 
the  banks  of  the  country,  by  using  them  as  depositaries 
and  also  as  fiscal  agents,  nevertheless  it  would  be  difficult 
to  trace  the  influences  due  exclusively  or  principally  to  the 
independence  of  the  Treasury  in  its  relation  to  the  banks, 
because  of  the  disturbing  causes  due  to  the  war  and  the 
currency  system. 

Moreover,  whatever  the  influence  of  such  a  system,  it 
must  have  been  largely  increased,  if  not  changed  in  char- 
acter, by  the  mere  growth  in  magnitude  of  the  fiscal  opera- 
tions of  the  Government,  as  well  as  by  the  rapid  industrial 
and  commercial  development  of  the  country,  and  espe- 
cially by  the  tremendous  growth  of  credit  which  the  past 
generation  has  witnessed.  Commerce  has  multiplied 
many  times  and  there  is  a  far  greater  solidarity  of  business 
interests,  due  to  improved  means  of  communication,  busi- 
ness reorganization,  consolidation  of  capital  and  develop- 
ment of  corporate  organization.  Consequently,  in  a  way, 
business  is  much  more  sensitive  to  disturbing  influences, 
although  at  the  same  time  its  power  to  withstand  serious 
shocks  has  also  increased. 

For  a  period  of  twelve  or  fifteen  years  following  the 
resumption  of  specie  payments,  we  find  the  independent 
treasury  system  operating  in  a  way  that  enables  us  to 
study  its  effects  with  the  smallest  number  of  entangling 
influences.  During  this  period  the  independence  of  the 
Treasury  continued  as  it  had  been  modified  by  the  national- 


149 


National    Monetary     Commission 

bank  act  at  the  beginning  of  the  civil  war.  Its  evils  were 
not  so  constantly  felt  nor  so  clearly  understood  as  to  pro- 
duce a  positive  policy  of  constructive  amendment  of  the 
subtreasury  law,  such  as  has  been  followed  in  the  past  ten 
years.  It  operated,  therefore,  during  the  decade  or  more 
following  1880,  with  less  active  interference  on  the  part  of 
the  Secretaries  of  the  Treasury  than  at  any  time  since. 
During  this  period,  therefore,  its  operation  is  more  easily 
studied. 

During  the  past  ten  or  fifteen  years,  on  the  other  hand, 
in  consequence  of  the  realization,  on  the  part  of  Secreta- 
ries of  the  Treasury  and  business  men,  of  the  evil  influences 
of  the  subtreasury  system  on  business,  there  has  grown 
up  a  policy  of  active  interference  on  the  part  of  the  Treas- 
ury Department.  To  prevent  these  evils  succeeding  Secre- 
taries have  deliberately  set  themselves  at  work  to  counter- 
act and  even  to  anticipate  the  effect  of  subtreasury  action. 
This  action,  therefore,  is  not  so  clearly  traced  in  the  sta- 
tistical registers  of  business  as  it  would  have  been  in  the 
absence  of  such  interference. 

In  other  words,  the  sixty  years  of  existence  of  the  inde- 
pendent treasury  system  is  pretty  clearly  divisible  into 
five  periods,  in  only  two  of  which,  the  first  and  fourth,  has 
it  operated  under  normal  conditions;  and  in  the  first  of 
these  two  its  operations  were  not  sufficiently  extensive  to 
teach  us  many  lessons.  Briefly  stated,  these  periods  are: 
( i)  A  period  of  quiescence,  during  the  first  fifteen  years  of 
its  life;  (2)  the  period  of  the  civil  war,  when  a  departure 
from  independence  was  made ;  (3)  the  period  of  fiat  paper 
money,  extending  to  1879;  (4)  ^  second  period  of  quies- 
cence, with  increasing  government  revenue  and   rapidly 

150 


Independent  Treasury  of  the   United  States 

enlarging  business,  extending  down  to  the  early  nineties; 
(5)  the  period  of  active  interference  by  the  Secretaries  of 
the  Treasury  to  prevent  the  injurious  influence  of  sub- 
treasury  activities  under  a  policy  of  surplus  financiering. 

Moreover,  as  we  have  already  seen,  the  functions  of  the 
independent  treasury  have  themselves  changed,  both  in 
extent  and  character.  In  addition  to  its  intended  duties 
of  receiving  and  disbursing  Government  money,  the  inde- 
pendent treasury  has  for  years  performed  some  of  the  func- 
tions of  a  bank  of  deposit  and  issue.  "  The  duties  of  the 
subtreasuries,"  said  Treasurer  Jordan  in  1886,  "have 
changed  since  the  passage  of  the  laws  authorizing  the  issue 
of  the  various  kinds  of  certificates  of  exchange,  and  redemp- 
tion of  the  silver  coinage  and  paper  currency  of  the  country. 
Each  subtreasury  is  now  a  bank  of  issue  and  redemption. 
Whether  such  fimctions  should  be  performed  by  these 
offices  is  a  grave  question."'^  These  activities,  extending 
as  they  do  far  beyond  the  scope  of  the  subtreasury  system 
as  first  established,  make  its  influence  on  business  different 
from  what  it  would  be  if  these  duties  were  not  performed. 

It  may  seem,  at  first  thought,  that  the  influence  of  the 
independent  treasury  on  business  might  be  directly  traced; 
that  prices  and  the  rate  of  interest  might  be  shown  to  vary 
with  the  absorptions  and  disbursements  of  money  by  the 
Treasury,  and  that  thus  there  might  be  shown  to  exist 
between  business  and  the  fiscal  machinery  a  connection 
so  close  as  to  amount  to  a  demonstration  of  the  influence 
of  the  latter.  Unfortunately,  however,  this  can  not  be 
done.     For  large  amounts  of  money  may  be  withdrawn 


o  Treasurer   Jordan,    on    proposed    subtreasury    at    Louisville.     Senate 
Com.  Rept.,  No.  1834,  49th  Cong.,  2d  sess.,  II. 

151 


National    Monetary     Commission 

from  circulation  without  any  apparent  effect  on  the  rate 
of  interest,  or  on  business;  and  the  effects  of  changes  in  the 
circulation  are  modified  by  the  widely  extended  use  of 
credit.  Credit  instruments  of  one  sort  and  another  per- 
form a  very  large,  perhaps  the  larger,  part  of  our  exchanges. 
Price  changes,  therefore,  depend  more  directly  on  variations 
in  the  amoimt  of  credit  than  of  the  money  in  circulation. 
Moreover,  the  elements  that  enter  into  the  determination 
of  prices  are  so  numerous,  so  variable,  and  sometime  so 
obscure,  that  we  can  not  eliminate  those  which  are  not 
material  to  the  problem  of  finding  the  causes  of  variation  at 
a  given  time.  Direct  proof  of  the  effect  of  subtreasury 
action  on  prices  is,  therefore,  impossible.  The  same  is 
true  of  variations  in  the  rate  of  interest.  So  far  as  they 
are  caused  by  the  independent  treasury,  they  are  due  to 
the  changes  effected  by  it  in  the  amount  of  loanable  funds. 
But  usually  no  direct  connection  can  be  positively  shown, 
because  variations  in  the  amount  of  loanable  capital  are 
not  the  only  cause  of  variation  in  the  rate  of  interest. 

THE  REACTION  OF  THE  SUBTREASURY  SYSTEM  ON  THE  BANKS. 

The  influence  of  the  independent  treasury  on  business  is 
exerted  mainly  through  its  action,  direct  or  indirect,  on 
the  volume  and  character  of  the  purchasing  medium  of  the 
country.  The  independent  treasury  at  one  time  absorbs, 
at  another  disburses,  considerable  sums.  There  is  nothing 
in  its  organization  that  makes  its  receipts  and  payments 
necessarily  concomitant  with  a  free  and  stringent  con- 
dition of  the  money  market  respectively.  Its  action  is, 
in  the  main,  independent  of  either  condition.  That  it 
must  have  a  tendency  to  influence  prices,  depending  on 

152 


Independent   Treasury  of  the   United   States 

the  extent  of  its  absorption,  retention,  and  disbursement 
of  money  is,  therefore,  clear. 

A  series  of  tables  and  diagrams  are  presented  below, 
representing  the  receipts  and  disbm-sements  of  the  New 
York  subtreasury,  the  amounts  to  and  from  the  clearing- 
house banks  in  New  York  City,  customs  receipts  of  the 
Government,  etc.,  for  different  periods.  Table  i  gives  the 
receipts  and  disbursements  of  the  New  York  subtreasury 
from  September,  1890,  through  June,  1891. 

Table   i  . — Receipts  and  disbursements  of  the  New  York  subtreasury,  Septem- 
ber, i8go,  to  June,  i8gi,  inclusive. 

[Expressed  in  millions  of  dollars.] 


Week  ending — 

Receipts. 

Disburse- 
ments. 

Net  gain. 

Net  loss. 

Balance 
of  gain. 

Balance 
of  loss. 

1890. 
Sept.  s 

14.3 
19.  6 
42.  7 
25.6 

0.  2 

2.8 

23.  I 

8.5 

12 

16 
19 

17 

8 
S 

I 

19 

26 

Month  .  . 

67 

S 

102.  2 

34-6 

34.6 

Oct.  3 

17 
18 
14 
13 
15 

7 
3 
8 
9 
9 

16.6 

IS. 8 
14.  0 
12. s 
14.8 

I.  I 

2.5 

.7 
1.4 

I.  2 

10 

17 

24 

31 

Month  .  . 

80 

6 

73-7 

6.9 

6.9 

Nov.  7 

12 
13 
14 
1 1 

3 

7 
6 
0 

1 1.  I 
14.  6 
14. S 
10.  6 

I.  2 

14 

•  9 

21 

.  I 
•4 

28 

Month  .  . 

51 

6 

so.  8 

I-  7 

■  9 

.8 

Dec.  s 

16 
13 
14 
12 

6 
S 
2 
7 

13.0 

22.5 

IS. 8 
13.8 

3.6 

12 

9.0 
1.6 
I.  I 

19 

26 

Month  .  . 

57 

0 

65.1 

3.6 

11.7 

8.1 

153 


National     Monetary     Commission 


Table  i  . — Receipts  and  disbursements  of  the  New  York  subtreasury,  Septem- 
ber, i8go,  to  June,  i8gi,  inclusive — Continued. 


Week  ending — 

Receipts. 

Disburse- 
ments. 

Net  gain. 

Net  loss. 

Balance 
of  gain. 

Balance 
of  loss. 

1891. 

Jan.  2 

9 

16 

20.3 
14.  2 
iS-o 
17-5 
17. I 

84.  I 

16.  I 
iSS 
17.2 
17.7 
12.4 

4.  2 

1-3 

2.  I 

.  2 

23 

30 

4.8 

Month  .  . 

78.9 

8.9 

3.6 

S-3 

Feb   6           ... 

13-6 
16.  9 
13    3 

12.  I 

130 

134 

9-  I 

9-5 

.6 
3    5 
4.  I 
2.6 

13 

27 

Month  .  . 

55-9 

45    0 

10.8 

10.8 

Mar    6 

13-3 
12.8 
Tfi    n 

12.4 
14-9 
18.7 
14.8 

.9 

13 

2.  I 

2.  7 

•S 



Month 

56-4 

60.8 

•9 

5-3 

4  42s 

Apr.  3 

14-  6 
20.3 
17-  7 
19.  I 

150 
22.  2 
19-  7 
20.  4 

•  4 
1-9 
2.  0 
1-3 

17 

24 

Month 

71.7 

77-3 

S.6 

5.6 

May  I 

8 

17.  7 
19-3 

17-5 
20.  0 
23.8 
36.8 
23 -4 

.  2 

•  7 

.6 

■  7 

1.  I 

22 36.  I 

118.6 

121. s 

.  2 

3-  I 

June  5 

26.6 
18.7 
19.  6 
17.7 

27.7 
21.  7 

2SS 

20.  6 

1.  1 
3-  I 
5-9 
2.8 

19 

26 

Month 

82.6 

9SS 

12.9 

12.9 

154 


JO      6      M     ZO    2.7     4      /J      20    Z7 


Pio.  I.— Course  of  the  D«t  weekly  b 


ir  loss,  of  the  New  York  subUeasury,  September,  1890,  to  Jnui 


41969"— 10.     (To  face  page  155.) 


^^Bs. 


Independent   Treasury  of  the   United  States 

In  the  ten  months  here  represented  there  was  a  con- 
tinual variation  of  the  amount  of  money  in  the  channels 
of  business,  due  to  the  ordinary  operations  of  the  sub- 
treasiuy  at  New  York.  It  poured  out  over  $34,000,000, 
net,  in  September;  withdrew  nearly  $8,000,000  in  the 
following  two  months;  let  out  over  $8,000,000  in  Decem- 
ber, and  in  the  last  fom*  months  of  the  period  made  a  net 
addition  to  the  money  afloat  of  nearly  $26,000,000.  The 
changes  are  shown  graphically  in  figure  i.  All  points 
below  the  line  represent  net  loss  and  all  above  it  net  gain 
for  the  subtreasury.  Each  square  running  horizontally 
represents  two  weeks,  and  vertically,  $1,000,000. 

Table  2  gives  data,  which  are  presented  graphically 
in  figure  2,  showing  the  net  weekly  balance  of  gain  or 
loss  of  the  New  York  subtreasury  from  September,  1899, 
to  August,  1900." 

The  striking  fact  again  shown  by  the  table  and  dia- 
gram is  the  sharp  variations  in  the  balances  of  receipts 
and  disbursements.  The  important  thing,  of  cotnse, 
from  the  point  of  view  of  disturbance  of  the  market  is 
the  suddenness  and  extent  of  the  changes  in  the  balance. 

We  see  that  the  high  points  in  the  excess  of  receipts 
were  about  the  first  or  second  week  of  September,  Decem- 
ber, March,  May,  June,  and  August,  while  the  excess 
of  disbursements  over  receipts,  shown  by  the  low  points 
of  the  curve,  are  toward  the  end  of  December,  January, 
March,  May,  June,  and  August.  The  changes  are  very 
sudden. 

If  we  look  at  the  returns  by  months,  it  appears  that 
during    eight    of    the    twelve    the    subtreasury    receipts 

«  These  figures  and  those  in  the  next  table  were  kindly  furnished  me  by 
the  assistant  treasurer  at  New  York. 

155 


National     Monetary     Commission 

exceeded  disbursements;  while  the  opposite  was  true  in 
January,  April,  July,  and  August.  The  excess  of  receipts 
over  disbursements  for  the  year  was  $64,136,000.  This 
meant  a  contraction  of  the  currency  to  that  extent 
except  so  far  as  offset  by  government  deposits  in  banks 
or  by  bond  purchases.  Whether  this  contraction  had 
any  influence  in  producing  the  low  scale  of  prices'^  for 
domestic  goods,  which  led  to  the  tremendous  exports  of 
1900,  would  be  an  interesting  study.  Such  a  contraction 
might  induce  a  reduction  of  loans  to  an  extent  between 
$200,000,000  and  $300,000,000. 

Table  2. — Receipts  and  disbursements  of  ike  New  York  suhfreasury,  Septem- 
ber I,  i8gg,  to  August  31,  igoo. 


[Expressed  in 

thousands  of  dollars.] 

Week  ending — 

Receipts. 

Disburse- 
ments. 

Net  gain. 

Net  loss. 

Balance  of 
gain. 

Balance  of 
loss. 

1899. 
Sept.  I 

30,  252 
35.  924 
33,975 
34,977 
34,049 

27,  181 

30,  107 
26,  744 

31,  417 
28,879 

3,071 
5,817 
7,231 
3,560 
5,  170 

8 

IS 

22 

29 

Month .  . 

24,849 

24,849 

Oct.  6 

30,664 
27,  703 
27,  676 
21,98s 

26,556 
26,  212 
22,  669 
21,  233 

4,  108 
1,491 

5,007 
752 

13 

20 

27 

Month  .  . 

11,358 

11,358 

Nov.  3 

21,931 
19.  770 

22,351 

25,624 

18,  466 
16,032 
22,463 
24,939 

3.46s 
3,738 

10 

17 

I,  1 12 

24 

685 

Month  .  . 

7,888 

I,  112 

6,776 

1  Compared  with  European  prices. 


156 


Independent   Treasury  of  the    United  States 


Table  2. — Receipts  and  disbursements  of  the  New  York  subtreasury,  Septem- 
ber I,  i8gg,  to  August  ji,  igoo — Continued. 


Week  ending — 

Receipts. 

Disburse- 
ments. 

Net  gain. 

Net  loss. 

Balance 
of  gain. 

Balance 
of  loss. 

1899. 

20,538 
25, 804 
23, 601 
24,  465 
IS. 672 

22,  082 
17,  714 
19,365 
27,  749 
17,  127 

I. 544 

8    

8,  090 
4,  236 

IS 

3.284 
I.  455 

29 

Month 

12,  326 

6,283 

6,043 

1900. 
Jan.  s 

17,  642 
23, 472 
28,879 
22,  789 

19,621 
25,882 
28,458 
25.636 

1,979 
2,  410 

19 

26 

421 

2,847 

Month 

421 

7.  236 

6,815 

Feb.  2 

25.003 
24,866 
20,  133 
20,  022 

23, 449 
21, 810 
19,099 
16, 966 

I.  SS4 
3.056 
I.  034 
3,056 

9 

16 

23 

Month 

8,  700 

8,  700 

25,  283 
23, 062 
20,886 
19,876 
18, 742 

19,828 
16,399 
19,  259 
19,993 
23. 201 

5.455 
6,663 
I,  627 

9  ■ 

16 

23 

30 

117 
4,459 

13.745 

4,576 

9,169 

Apr.  6 

13 

21, 921 
24,929 
26, 262 
22,631 

24.  431 
29,  519 

27,  690 

24,   212 

3.SIO 
4,590 
1.428 
I. 581 

27 

Month  .  . 

1 1,  109 

32,  117 
34,592 
26,228 
21, 913 

27,554 
26,994 
26, 290 
24,  667 

4,563 
7.598 

i8 

62 
2.  754 

25 

Month 

r2,  161 

157 


National    Monetary     Commission 

Table  2. — Receipts  and  disbursements  of  the  New  York  subtreasury,  Septem- 
ber I,  i8gg,  to  August  ji,  igoo — Continued. 


Week  ending — 

Receipts. 

Disburse- 
ments. 

Net  gain. 

Net  loss. 

Balance 
of  gain. 

Balance 
of  loss. 

1900. 
June  I 

18,884 
24,  495 
36,019 
28, 790 
21,343 

19,843 
23, 664 
27,  209 
28, 003 
21,  oos 

959 

8 

831 

8,810 

787 

338 

IS 

Month... 

10,  766 

959 

9.807 

1 

July  6 

17,878 
26,s86 
27.529 
22,539 

21,  230 
27,355 
25, 902 
23, 804 

3.352 
769 

I,  627 

I.  265 

Month. . . 

1,  627 

5,386 

3.759 

27,  117 
42,  760 
40,  245 

21,638 

20, 041 

28,016 
32,862 
38,  244 
27,  733 
26,073 

899 

9,898 
2,  001 

6,09s 
6,032 

31 

Month... 

II,  899 

12,  127 

228 

Figure  2  presents  the  same  facts  graphically  and  brings 
out  very  strikingly  not  only  the  extent  but  the  sharpness 
of  the  changes. 

The  third  table  shows  the  changes  in  the  reserves  of  the 
associated  banks  of  New  York  City  for  the  period  covered, 
by  the  preceding  table  and  furnishes  the  means  of  com- 
paring the  relation  of  subtreasury  receipts  and  disburse- 
ments to  reserve  losses  and  gains.  The  tables  are  com- 
piled from  the  reports  of  the  Commercial  and  Financial 
Chronicle. 


158 


Independent   Treasury  of  the    United   States 


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159 


National    Monetary     C  ommis  s  io 


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Table  3. — Changes  in  reserve  of  New  York  Associated  Banks,  September  i, 
iSgg,  to  August  ji,  igoo. 

[Expressed  in  thousands  of  dollars.] 


Week  ending — 

Subtreasury 
action. 

Interior 
movement. 

Net  gain  (  +) 
or  loss  (  — ). 

Variation  in 
reserve. 

1899. 

—  3.000 

—  4.  soo 

—  3. 100 

—  2,000 

—  I , 000 

-3.387 

-s.  156 

-4.775 
-3.273 
-2.  293 

-  6.387 

-  9.656 

-  7.87s 

-  s. 273 

-  3.  293 

-  S.272 
-10,571 

—  5,947 

—  2,510 

-  4,546 

8 

Month 

—  13,  600 

Oct.  6 

13 

—  1.500 

—  500 
+    2,000 

—  200 

—  2,403 

—  1 , 612 
-3.374 
-1,822 

-  3.903 

—  2,112 

-  1.374 

—  2,022 

-  2, 133 

-  I . 019 

-  1.379 

-  88 

Month       ... 

—         200 

Nov.  3 

—  2,000 

—  2,600 
+    I.  135 
+    6.500 

—  2,  056 
-I.  793 

-  928 
+  1,466 

-  4.056 

-  4.393 
+         207 
+    7.966 

+        486 

Month 

+    3.03s 

Dec.  I 

+    3.300 

—  3 , 200 

—  3.950 

—  1.450 

—  4, 600 

-       184 
-3. 272 
+  5.389 
-I. 318 
+  3.  191 

+    3. 116 

-  6,472 
+    1.439 

-  2,768 

-  1.409 

8 

+   3.572 
+        697 

Month 

—    9.900 

i 

1900. 

-  3.350 

—  400 
+    3.300 
+    2,300 

+  6,393 
+  7.  i88 
+  8,071 
+  7.469 

+    3.043 
+    6.788 
+  11. 371 
+    9, 769 

+    2. 816 

+    5    033 

+  11.  536 

26 

+    8,844 

Month 

+    1.850 



Feb.  2 

+         500 

—  700 

—  I , 600 

—  2,  200 

+  4.913 
+  2.533 

—  1 ,  029 

-  84s 

+    S.413 
+    1.833 

—  2,629 

-  3.04S 

+    5.441 

+    I . 744 

16 

—    2,324 

23 

-    2,87s 

—    4,000 

160 


Independent   Treasury  of  the    United   States 


Table  3. — Changes  in  reserve  of  New  York  Associated  Banks,  September  i, 
iSgp,  to  August  31,  1900 — Continued. 


Week  ending — 


Subtreasury 
action. 


Interior 
movement. 


Net  gain  (  +  ) 
or  loss  (  — ). 


Variation  in 


1900 

Mar.  2 

9 

16 

23 

30 

Month .  .  . 

Apr.  6 

13 

20 

27 

Month .  .  . 

May  4 

II 

18 

25 

Month .  .  . 

June  I 

8 

IS 

22 

29 

Month  .  .  . 

July  6 

13 

20 

27 

Month .  .  . 

Aug.  3 

10 

17 

24 

31 

Month.  .  . 


—  6,000 

—  6,000 

—  4,  000 

—  I, 200 
+   1,300 


-IS. 900 


+  4,  000 
+  S.900 
+  3.000 
+    1,500 


+  14,  400 


—  2,900 

—  2,000 

—  76s 

—  300 


5.965 


—  200 

—  3, 100 

—  4,600 

—  2,000 

—  2,800 


-12, 700 


700 


+  1.352 
-3.826 
—  I.  051 
+  2,  151 
+  1.  526 


-  4,648 

-  9.826 

-  5.051 
+  951 
+  2,826 


+  2,  113 
—  2,  448 
+  2,  639 
+  5.  131 


+  6,113 
+  3.452 
+  5. 639 
+  6,631 


+  3.483 
+  4,035 
+  2,  745 
+  4.387 


+    583 

+  2,035 
-f  1,980 
+  4.087 


+  3.065 
+  3.  192 
+  2,  964 
+  2.685 
+  1.554 


+  2,86s 
+     92 

-  1,636 
+    68s 

—  I . 246 


+  1.657 
+  1,  491 
+  2.507 
+  3.  113 


+  3.657 
+  I. 591 
+  I  , 007 
+  3. 213 


+  2,800 

—  5. 100 

—  10,  000 
+  1,500 
+  2, 200 


+  3.  191 

+  1,481 
+  2,388 
+  1,418 
+  2,  631 


+    5.991 

—  3.619 

—  7,612 
-t-  2,918 
-I-    4,831 


—   3.500 


-  5. 274 

-  8,088 

-  6,826 

-  361 
+    S.944 


+  1.738 
+  6,004 
+  6, 019 
+  4.538 


+  3. 177 
—  I, 123 
+  1,566 
+  4. 255 


+    4. 147 

—  301 

—  369 

—  3. 169 
+        649 


—  2,870 
+  4.781 
+  3. 793 
+    4.871 


+    3. 269 

-  287 

-  8,342 
+  5.092 
+        372 


41969°— IC 


161 


National    Monetary     Commission 

It  will  be  seen  from  the  table  that  the  reserves  of  the 
banks  fell  through  September  and  October;  that  they 
rose  from  the  middle  of  December  to  the  middle  of  Febru- 
ary; fell  until  the  end  of  March;  and  at  the  end  of  March 
increased  until  early  in  June,  during  which  month  they 
fell  and  then  increased  through  the  summer.  During 
these  months  the  action  of  the  subtreasury  was  against 
the  bank  reserves  in  September  and  October;  aided  them 
somewhat  in  November  and  January;  drew  them  down 
again  in  the  two  following  months  as  well  as  in  May,  June, 
and  the  following  August, 

Comparing  Tables  2  and  3  it  appears  that  in  September, 
1899,  the  net  gain  of  the  New  York  subtreasury  was 
$25,000,000  and  the  loss  of  the  banks  due  to  subtreasury 
action  nearly  $14,000,000.  Besides  the  loss  to  the  bank 
reserves  by  subtreasury  action  there  was,  therefore,  a 
loss  of  $11,000,000  or  $12,000,000  to  the  general  circula- 
tion. Even  in  the  month  of  November,  when  the  banks 
gained  from  the  subtreasury,  the  balance  of  gain  to  the 
subtreasury  itself,  which  was  nearly  $7,000,000,  shows  a 
contraction  of  the  general  circulation  to  the  extent  of 
nearly  $4,000,000.  Other  comparisons  are  unnecessary. 
The  changes  of  reserve  due  to  the  action  of  the  subtreas- 
ury alone  are  represented  graphically  in  figure  3. 

Table  4,  with  its  accompanying  diagram,  gives  the 
weekly  receipts  and  disbursements  of  the  New  York  sub- 
treasury  from  April,  1907,  to  March,  1908.  This  was  a 
period  of  violent  disturbance  in  the  money  market  and  in 
business  generally.  Indeed,  it  was  the  severest  crisis 
through  which  the  country  has  passed  since  1893.  The 
rapid  variations  in  the  receipts  and  disbursements  of  the 

162 


Independent   Treasury  of  the   United   States 


MILLIONS    or    DOLL/tKS 


;e=eee===5= 


ij   c^ 


^1 


=  .5 


5i   C 


=  ^ 


163 


National     Monetary     Commission 

subtreasury,  as  shown  by  the  diagram,  which  presents  the 
net  balance  of  gain  or  loss  each  week,  reflect  the  great 
uncertainty  of  the  money  market  and  the  close  relation  of 
treasury  operations  and  bank  reserves,  and  through  them 
upon  loans  and  discounts  and  upon  business. 

In  the  week  beginning  April  5 ,  from  an  excess  of  receipts 
of  nearly  $6,000,000  there  was  a  fall  to  an  excess  of  dis- 
bursements of  more  than  $3,000000.  This  excess  of  dis- 
bursements was  changed  to  a  net  gain  of  receipts  of  nearly 
$3,000,000  two  weeks  later;  which,  three  weeks  afterwards 
became  again  an  excess  of  disbursements  of  nearly 
$2,000,000.  The  next  two  weeks  saw  a  gain  in  receipts,  so 
that  by  the  7th  of  June  there  was  a  net  excess  of  receipts 
over  disbursements  to  the  extent  of  nearly  $7,000,000. 
Similar  violent  changes  are  shown  from  week  to  week 
throughout  the  year.  The  most  striking  occurred  in  the  two 
weeks  between  the  5th  and  19th  of  July,  and  the  two  weeks 
between  October  18  and  November  i.  In  the  first  two 
weeks  we  see  a  change  from  a  balance  of  disbursements 
over  expenses  of  between  $6,000,000  and  $7,000,000  to  an 
excess  of  receipts  over  disbursements  in  the  following  week 
to  the  extent  of  nearly  $12,000,000,  with  an  immediate 
fall  through  the  next  week  to  an  excess  of  disbursements 
over  receipts  amounting  to  more  than  $7,000,000.  The 
change  in  October  was  even  greater.  It  was  in  this  period 
that  the  most  active  and  radical  measures  ever  taken  to 
counteract  the  evils  of  subtreasury  influence  on  the  money 
market  were  put  into  operation  by  the  Secretary  of  the 
Treasury. 


164 


Independent   Treasury  of  the    United   States 


Table  4. — Receipts  and  disbursements  of  New  York  subtreasury,  April  5, 
1907,  to  March  27,  1908. 

[Expressed  in  thousands  of  dollars.] 


Week  ending — 

Receipts. 

Disburse- 
ments. 

Net  gain. 

Net  loss. 

Balance  of 
gain. 

Balance  of 
loss. 

1907. 

April    5 

April  12 

April  19 

April  26 

43, 144 
28,153 
30,929 
31.682 

37,460 
31.353 
31.551 
29,  068 

5.684 

3.  200 
622 

2,614 

Month  .  . 

8,  298 

3,822 

4,476 

May     3 

May  10 

May  17 

May  24 

May  31 

33. 140 
28,868 
2S.930 
26,  630 
25.417 

31.429 
27.867 
27,80s 
26,817 

I.  711 
I,  001 

1,87s 
187 

2    ^66 

5.178 

2,  062 

2,  116 

June     7 

June  14 

June  21 

June  28 

33.621 
28,787 
32,  712 
40, 690 

26,914 
27,630 
28,485 
37.003 

6,707 
I,  157 
4.  227 
3.687 

Month 

15,778 

15,778 

July     5 

July  12 

July  19 

July  26 

28,81s 
48,968 
27.  113 
29.  380 

35.343 
37.057 
34.576 
33.8II 

6,528 

II, 911 

7,463 
4,431 

Month 

II, 911 

18,  422 

6,  sii 

32,380 
28,063 
27.995 
30,467 
29.637 

31. 026 

28,  176 

29,  800 
27.474 
28,  492 

1.354 

August    9 

August  16 

August  23 

August  30 

113 

1,80s 

2,993 
I.  145 

Month 

5.492 

1,918 

3.574 

22,988 
28,  033 
27.958 
30,371 

24.358 
29, 721 
30,  716 
27,490 

1.370 
1,689 
2,758 

September  13  .  . 
September  20 .  . 
September  27 .  . 

2,881 

Month.. 

2,881 

5. 817 

2,  936 

. 

165 


National    Monetary     Commission 

Table  4. — Receipts  and  disbursements  of  New    York  subtreasury,  April  5, 
1907,  to  March  27,  igo8 — Continued. 


Week  ending — 

Receipts. 

Disburse- 
ments. 

Net  gain. 

Net  loss. 

Balance  of 
gain. 

Balance  of 
loss. 

1907. 

30.237 
29.  715 
30,437 
56,  264 

29.503 
30,  860 
33.212 
74.  792 

734 

I.  145 

2,775 

18,528 

October  18 

October  25 

Month    . 

23.182 

23, 182 

59.03s 
47,683 
55,300 
42,318 
44, 166 

49.  264 
47.549 
52.  702 
37.  292 
46,  030 

9,  771 

134 

2,598 

5,026 

November    8   .  . 

November  is  .  . 

1,864 

Month 

17.529 

1,864 

15.665 

37,490 
33<  760 
37.  157 
23.475 

41.374 
30,375 
38,828 
25. 252 

3.884 

3.385 

1,671 
I.  777 

December  27.  .  . 

Month     . 

3.385 

7.332 

1908. 
January    3  .  .  .  . 
January  10 .  .  .  . 
January  17.... 
January  24 ...  . 
January  31  ...  . 

30,931 
34,  703 
S3, 194 
30,359 
50,  791 

30,559 
33. 130 
47.  620 
45.073 
46,885 

372 
1.573 
5,574 
5,386 
3,906 

Month 

16, 711 

i6,  711 

February     7  .  .  . 
February  14.  .  . 
February  21  .  .  . 
February  28 . .  . 

36,081 
30,668 
44,  228 
30,  198 

36,931 
32,010 
37.649 
31,621 

850 
1.342 

6,579 

1.423 

Month  .  . 

6,579 

3.61S 

2,964 

33,577 
35,072 
33,953 
39,  76s 

35.690 
33,048 
36,996 
36,  194 

2,  113 

March  13 

2,  024 

3,043 

March  27 

3.571 

Month  .  . 

5,595 

s,  156 

439 

166 


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Fio.  4. — Net  weekly  balance  or  gain  or  loss  of  the  New  York  subtreasury  from  April.  1907.  to  March,  1 


41969*" — 10.     fTo  face  page  166,) 


Independent   Treasury  of  the    United   States 

Table  5  with  accompanying  diagram,  shows  the  changes 
in  the  New  York  Bank  reserves  for  the  same  period.  Per- 
haps these  figm-es  can  not  be  fully  relied  upon  because  of 
the  bookkeeping  artifices  said  to  have  been  resorted  to  by 
some  banks,  in  the  panic,  in  order  to  show  a  proper  relation 
between  reserves  and  deposits.  Still  they  probably  show 
the  general  tendency  correctly. 

Table  5. — Changes  in  the  reserves  of  the  clearing-house  banks  of  New  York 
City,  April  5,  190J,  to  March  ji,  igoS. 

[Expressed  in  thousands  of  dollars.] 


Week  ending — 

Subtreasury 
action. 

Interior 
movement. 

Net  gain  or 
loss. 

Variation  in 
reserve. 

1907. 

+ 13. 600 
+    4.  500 
+    4.400 
-         494 

+        535 

-  I. 317 

-  992 

-  2, 141 

+  14.  13s 
+   3.183 
+   3.408 
-   2.63s 

+  10.534 
+    7.649 
+    2.477 

+        147 

26 

Month 

+  22.  006 

+         900 

—  2 , 000 
+    2,000 
+    I . 900 

—  1,000 

-    1.913 
+    1.529 
+   4.598 
+    2,436 
+   3, 105 

—  I. 013 

-  471 
+    6,598 
+    4.336 
+    2, los 

-  1,918 

-  2.384 
+   3.407 
+   5.851 
+        982 

31 

Month 

+    4. 800 

—  6,  400 

—  6, 900 

—  4,000 

—  10,  500 

+    i,Si6 

+    2,710 
+    2, 277 
+   3.463 

—  4,884 

—  4. 190 

-  I. 723 

-  7.037 

-  9,06s 

-  2,683 

-  711 

-  6,8ss 

28 

Month 

—  27,  800 

July    s 

—  1,000 

—  9,  000 
+    1.500 
+   3.500 

+    2, 162 
+    5. 896 

+    3. 172 
+    4, 291 

+    1,162 
-    3. 104 
+    4.672 
+    7.  791 

—   5.026 
+   4.076 
+    2,769 
+   S.866 

19 

a6 

Month 

—    5. 000 

167 


National     Monetary     Commission 


Table  5. — Changes  in  the  reserves  of  the  clearing-house  hanks  of  New  York 
City,  April  5,  190J,  to  March  ji,  1908. — Continued. 


Week  ending — 

Subtreasury 
action. 

Interior 
movement. 

Net  gain  or 
loss. 

Variation  in 
reserve. 

1907. 

1   1   1  +  + 

u>  0  0  0  0 
00000 
00000 

+    2.  733 

—  I , 291 
+    1,221 

-  4.087 
+    I. 539 

+    3, 733 

-  291 

-  779 

-  6,087 

-  961 

—        903 

—   5.312 

16 

-    2,828 

-    2,086 

—    I. 652 

-   4.  soo 

+    I , 000 
+    2,500 
+    3, 200 
+    I , 000 

+         934 

—  1,412 

—  I , 609 

—  4.495 

+    1.934 
+    1,088 
+    1,501 
-    3,495 

-    1,427 

-        862 

+   4.529 

—    3. 216 

+    7,700 

Oct      4           

—    I , 000 
+    1,000 
+    4,000 
+  21,  000 

-  3.926 

-  4.88s 

-  4,394 

-  16,320 

-  4,926 

-  3.885 

-  394 
+    4.680 

—    7,621 

-        656 

18            

+    6,443 

—  I  2,  901 

+  25 ,  000 

+    9. 500 

+  15,  000 
+  15,000 
+  13,  000 
+  15,900 

—  17.023 

—  17,  400 

—  22,  616 
-17,337 
-10,577 

—  7,523 

—  2, 400 

-  7,616 

-  4.337 
+    5.323 

—  30,602 

8 

—    4,313 

—    I,  136 

—    2,808 

+    1.980 

+  68,400 

Dec.     6 

+  17.  300 
+    6. 700 
+    7, 100 
+    6,511 

-  9,024 

-  6,800 

-  5, 200 

-  2, 169 

+   8, 276 
—        100 
+    I , 900 
+    4.342 

+    4,671 

+    4. 113 

+    6,507 

+    9.439 

+  37.  6n 

1908. 

+    I , 000 
—    1 , 000 
+   3.500 
+    1.500 
+    3. 250 

+    5.458 
+  13.375 
+  12,  295 
+  20,  584 
+  17,  069 

+   6,458 
+  12,375 
+  15.795 
+  22,  084 
+  20,  326 

+    8,046 

+  18,390 

+  26,  186 

+  23.674 

+   6, 296 

+   8, 250 

168 


Independent   Treasury  of  the  United   States 


;    o-aa9'<^o>«<»i»>.    o> 

MILUQMS     or     DOLLARS 

. 

— 

■ — 

"■ 

1 

-- 

-^ 

\ 

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— 

1 — 

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3   5 


fu  "^ 


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169 


National     Monetary     Commission 

Table  5. — Changes  in  the  reserves  of  the  clearing-house  banks  of  New  York 
City,  April  5,  1907,  to  March  ji,  1908 — Continued. 


Week  ending — 

Subtreasury 
action. 

Interior 
movement. 

Net  gain  or 
loss. 

Variation  in 
reserve. 

Feb 

1908. 

+    I , 000 

—  I , 000 
+   6, 01 1 

—  5.000 

+    4.  4n 
+    4.308 
+    3.562 
+    2,949 

+    5.411 
+   3.308 
+   9.573 
—   2,051 

—       251 

28 

Month    .           .... 

+   1,011 

6       

Mar. 

+        500 

—  S.931 
+   3.000 

—  3. on 

+    3.358 
+    3.079 
+    4.645 
+    5.066 

+   3.858 
-   2,852 
+    7.645 
+   2,055 

+   2.893 

+    4. 178 

-   5.431 

These  tables  furnish  a  basis  for  a  comparison  similar  to 
that  made  between  Tables  2  and  3 .  In  the  month  of  April 
the  bank  reserves  gained  over  $22,000,000  from  sub- 
treasury  operations,  yet  the  subtreasury  itself  showed  a 
balance  of  gain  of  more  than  $4,000,000,  thus  showing 
that  it  was  contracting  the  circulation,  even  though  it  was 
directly  aiding  the  banks.  The  same  is  true  of  the 
month  of  May.  In  June,  however,  while  the  banks  lost 
nearly  $28,000,000  through  subtreasury  action,  the  sub- 
treasury  net  gain  was  nearly  $16,000,000.  Part  of  its 
total  gain,  therefore,  went  into  general  circulation.  In 
July  the  net  loss  of  the  bank  reserves  through  sub- 
treasury  action  was  $5,000,000,  yet  the  subtreasury  itself 
had  a  net  loss  of  $6,500,000.  This  shows  a  great  increase 
of  the  circulation  at  a  tim.e  when  it  was  least  needed. 
Doubtless  the  plethora  of  currency  had  much  to  do  in 
promoting  the  speculation  which  preceded  the  panic  in 


170 


Independent   Treasury  of  the    United   States 

the  fall.  It  is  not  necessary  to  compare  the  tables  more 
in  detail.  They  again  show  that  no  dependence  can  be  put 
by  the  banks  on  the  action  of  the  subtreasury.  The  data 
of  Table  5  are  presented  graphically  in  the  diagram  and 
reveal  the  course  of  procedure  more  clearly  to  the  eye. 
For  the  sake  of  showing  that  the  irregularity  of  action 
is  not  peculiar  to  the  New  York  subtreasury,  Table  6  and 
Diagram  6  are  inserted  to  show  the  course  of  the  receipts 
and  disbursements  of  the  subtreasury  at  Chicago  for  the 
seven  months  from  September,  1907,  through  March,  1908. 


171 


National     Monetary     Commission 


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172 


Independent   Treasury  of  the    United  States 


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173 


National    M  o  net  ar  y     Commission 


MILLIONS    or  DOLLAHS 


174 


Independent    Treasury  of  the    United   States 


The  data  given  show  a  balance  of  loss  to  the  subtreasury 
account  through  the  months  of  September,  October, 
November,  and  January,  and  a  gain  in  December,  Febru- 
ary, and  March.  Of  course  the  influence  of  any  subtreas- 
ury other  than  that  of  New  York  City  depends  largely  on 
the  action  of  that  institution.  Hence  the  figures  for  Chi- 
cago must  be  considered  in  their  relation  to  those  for  New 
York  for  the  same  period.  The  returns  are  traced  in  the 
diagram  following. 

To  avoid  irregularities  incidental  to  the  peculiarities 
of  single  years,  and  to  show  that  the  lack  of  coincidence 
between  operations  of  the  independent  treasury  and  the 
banks  are  not  merely  occasional,  a  series  of  tables  follows. 
Table  7  shows  the  average  monthly  surplus  reserve  of  the 
New  York  banks  for  the  four  years,  1 888-1 892.  The 
table  shows  that  the  reserves  are  high  in  January,  Febru- 
ary, and  through  the  four  summer  months.  May,  June, 
July,  and  August.  In  March,  April,  and  the  last  four 
months  of  the  year  they  fall  considerably.  Figure  7  pre- 
sents the  data  graphically. 

Table  7. — Average  monthly  surplus  reserve  of  New  York  banks. <i 
[Expressed  in  thousands  of  dollars.] 


January  .  .  . 
February .  . 

March 

April 

May 

Juno 

July 

August .  .  .  . 
September . 
October .  .  . 
November . 
December . 


1888. 

1889. 

1890. 

1891. 

Average 

for  four 

years. 

18,676 

IS. 784 

8.971 

18.036 

IS. 367 

16, 506 

14,86s 

s.Sss 

16. 935 

13.540 

10,  014 

7,  192 

2.  253 

9.543 

7.  250 

12,463 

8,247 

1.638 

5. 824 

7.043 

24,  506 

14,423 

3.002 

5.974 

11,976 

27, 840 

9.618 

6,  172 

12,939 

14. 127 

27.651 

6,498 

5.  496 

17.052 

14.  174 

27. 590 

5.  044 

3.S30 

16.479 

13. 161 

12,  742 

4.044 

s.  172 

7,411 

7.342 

13,612 

I.  113 

3.  169 

9,500 

6,849 

11.384 

I,  172 

962 

11, 161 

6.  169 

8,  122 

2.  187 

3.81S 

16,961 

8,272 

o  The  table  is  compiled  from  returns  in  the  iMnancial  Chronicle  and  the  New  York 
Journal  of  Commerce. 

175 


National    Monetary     Commission 


MILLIONS     OF     DOLLARS 


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176 


Independent   Treasury  of  the    United   States 

Table  8,  in  three  sections,  shows  the  changes  in  the 
reserve  of  the  clearing-house  banks  of  the  city  of  New 
York  on  account  of  the  action  of  the  subtreasury,  as 
well  as  the  drain  of  money  to  the  interior  for  the  three 
periods:  From  September  5  to  November  28,  1890;  from 
February  4  to  December  30,  1898;  and  from  January  5 
to  December  31,   1906. 

Table  8. — Changes  in  the  holdings  of  the  New  York  associated  hanks  due 
to  the  action  of  the  subtreasury  and  the  interior  -movement  of  money,  and 
also  the  changes  in  the  total  reserved 

A.  FROM  SEPTEMBER  s  TO  NOVEMBER  28,  1890. 
[Expressed  in  thousands  of  dollars.] 


Week  ending- 


Sept,   s 


Oct, 


19 
26 
3- 
10  . 


17 

24 

31 

Nov.     7  .  .  .^. 
14 


21 . 


Subtreasury 
action. 

+ 

I 

600 

+ 

2 

600 

+ 

3 

700 

+  18 

Soo 

+ 

4 

Soo 

- 

2 

100 

- 

2 

soo 

- 

2 

300 

- 

700 

- 

900 

+ 

200 

+ 

700 

+ 

300 

Interior 
movement. 


-3.289 
-3.310 
-4. 411 
-3.933 
-S.781 
-4. 752 
-3.468 
-2,038 
-2, 290 

-  533 
-I . 129 
-I, 190 

-  514 


Net  gain  (  +) 
or  loss  (  — ). 


-  1,689 

-  710 
-t-  9,  289 
+  14,  567 

-  I, 281 

-  6,852 

-  S.968 

-  4.338 

-  2,990 

-  1.433 
+  1.329 

-  490 

-  214 


Variation  in 
reserve . 


-  52 

-  3. 193 
+  6,895 
-(-16,384 
+  1 . 020 

-  9.924 


-  4, 


311 
964 

207 
254 
292 
300 
484 


B.  FROM  FEBRUARY  4  TO  DECEMBER  30,  i? 


Feb. 


Mar, 


18. 
25  • 
4- 
II  . 
18. 
25- 


_ 

600 

- 

3 

800 

- 

2 

100 

- 

3 

000 

- 

4 

000 

+ 

800 

-f- 

6 

714 

+ 

7 

400 

+  2,008 

-  1, 131 

-  6, 779 

-  5.066 

-  7.934 

-  737 
-t-  3.  S13 
-I-  5.  160 

o  The  tables  are  compiled  from  the  weekly  returns  of  the  Commercial  and  Financial 
Chronicle.     The  (  +)  sign  means  gain  to  the  banks,  and  the  (  — )  sign  loss. 


+  3 

III 

-f2 

2  45 

—  I 

321 

-4 

140 

—  2 

1 45 

+  2 

800 

—  2 

097 

—  I 

172 

4- 

2 

511 

- 

I 

555 

- 

3 

421 

- 

7 

140 

- 

6 

145 

-f 

3 

600 

+ 

4 

617 

+ 

6 

228 

41969° 10 12 


177 


National    Monetary     Commission 


Table  8. — Changes  in  the  holdings  of  the  New  York  associated  hanks  due 
to  the  action  of  the  subtreasury  and  the  interior  movement  of  money,  and 
also  the  changes  in  the  total  reserve — Continued. 

B.   FROM   FEBRUARY  4  TO   DECEMBER  30.  1898— Continued. 


Week  ending — 


Apr.      I 

8 

IS 

32 
29 

May  6. 
13 
20, 
27 

June  3 
10 
17 
24 

July      I 

8 

IS 

22 

29 

Aug.  s 
1 2 
19 
26 

Sept.     2. 

9. 

16. 

23- 

3°- 

Oct.       7. 

14- 

21. 
28. 

Nov.  4, 
10. 
18. 
25. 

Dec.      2 

9 

16 

23 

30 


Subtreasury 
action. 


+  S.600 
+  11,  Soo 
+  S.Soo 

—  i,so6 
+  11,  soo 
+  4,  000 
+  4,  600 
+  3, 200 
+  I , 200 
+  2,  200 
+  1,300 
+  806 
+  I , 000 
+   100 

—  S. 700 
— 10,  000 

—  14,  000 

—  3.000 

—  2,500 

—  7,300 

—  6, 000 

—  9,000 

—  7,  soo 

—  II,  000 

—  4, 000 
+  soo 
+  5,800 
+  4,  soo 
+  6,500 
+  7,000 
+  4,  000 
+  2,  250 

—  I,  000 
+  I,  400 

—  soo 

—  I , 800 

—  1,600 

—  200 
+    soo 

—  2,  000 


Interior 
movement. 


-5.09s 
-8,323 
-3.  S14 

—  527 

—  4.  609 
-I.  717 
+  865 
+  3.  444 
+  4,  75S 
+3.312 
+3.813 
+  4.388 
+  4.  152 
+  4. 87s 
+  3,  222 
+  2,813 
+  2,  709 
+  3.  554 
+  1,  903 
+  4.  446 
+  2,  41S 
+  2,584 
-1,567 
+  1,163 

—  I,  251 

—  I,  662 
+  2,889 

—  2,  472 
-I.  771 
+  1,310 
+  3.  269 
+  1,311 
+  1.855 
+  2,  093 
+  1,  806 
+  2,844 
+  1.336 
+  662 
+  1,  184 
+  3,934 


Net  gain  (  +) 
or  loss  (  — ). 


SOS 
177 


-  2,033 
+  6,891 
+  2,  283 
+  5.465 
+  6,  644 
+  5. 955 
+  5. 512 
+  5.  113 
+  5.  194 
+  5.  152 
+  4.97S 

-  2,478 

-  7,  187 

-  II,  291 
+    554 

-  597 

-  2,854 

-  3,585 

-  6, 416 

-  9.067 

-  9.837 

-  5. 251 

-  I,  162 
+  8,689 
+  2,028 
+  4,  729 
+  8,310 
+  7,  269 
+  3.561 
+  85s 
+  3.493 
+  1,306 
+  I,  044 

-  264 
+  462 
+  1,684 
+  1.934 


Variation  in 
reserve. 


+  1,016 

—  3,784 
+  730 
+  5.604 
+   301 

—  310 
+  4.857 
+  7.285 
+  6, 744 
+  1,898 
+  5.289 
+  7.  123 
+  4,576 
+  2,939 

—  6,670 

—  4.050 

—  10,  468 

—  1 , 020 
+  1,831 

—  5,855 

—  3. 208 

—  8,691 

—  8,313 

—  13.036 

—  7. 795 
+  I,  184 
+  7.418 
+  5.586 
+  5. 002 
+  8,413 
+  6,625 

—  5. 190 
+  1.978 
+  4.014 
+  764 
+  440 
+  1,461 
+  2,761 
+  4.656 
+  1.583 


178 


Independent   Treasury  of  the    United   States 


Table  8. — Changes  in  the  holdings  of  the  New  York  associated  banks  due 
to  the  action  of  the  subtreasury  and  the  interior  movement  of  money,  and 
also  the  changes  in  the  total  reserve — Continued. 

C.  FROM  JANUARY  5  TO  DECEMBER  31.    1906. 


Week  ending — 


Jan  5 
12 
19 
26 

Feb       2 

9 

16 

23 

Mar.      2 

9 

16 

23 

30 

Apr  6 
13 
20 
27 

May  4 
1 1 
18 
25 

June     I 

8 

IS 

22 

29 

July  6 
13 
20 
27 

Aug.  3 
10 
17 
24 
31 

Sept.  7 
14 
21 
38 


Subtreasury 
action. 

_ 

4,  200 

+ 

3.000 

+ 

4,  000 

+ 

7,  000 

- 

6.  000 

- 

2.  000 

- 

3.900 

- 

I,  500 

- 

3.900 

+ 

I.  000 

+ 

2,  000 

+ 

500 

- 

1 ,  216 

- 

1 .  000 

+ 

3.  700 

+ 

0,  000 

+ 

6,  000 

+31.000  1 

+ 

7,  000 

+ 

3,  000 

+ 

3,  000 

+ 

4.  400 

+ 

2.  400 

+ 

3.000 

+ 

2,  500 

+ 

2,  500 

- 

3.  500 

- 

I  ,  000 

- 

6,  000 

+ 

2,  500 

- 

2,500 

- 

1 ,  600 

+ 

I,  Soo 

- 

3.  000 

- 

1 ,  900 

- 

3.500 

+ 

14. 000 

+ 

2,  000 

- 

I,  000 

Interior 
movement. 


+  5.351 
+  6,960 
+  6, 170 
+  4, 740 
+  4.68s 
+  2.349 
+  1,880 
+  3. 494 
+    2.838 

—  351 
+  2, 253 
+  1,788 

—  2. 777 

—  5.300 
+  3,676 

—  4, 150 

—  20,  570 

—  20,  914 

—  2.841 

—  1.649 

—  2, 177 
+  806 
+  I,  113 

—  223 

+  I. 552 
+  3. 241 
+  130 
+  2, 181 
+  4, 642 
+  8.722 
+  5, 191 

—  1,819 

—  5,325 

—  2,517 

—  2,562 

—  6.235 

—  2,070 

—  4.  560 

—  4,539 


Net  gain  (  +)    Variation  in 
or  loss  (  — ).  reserve. 


+  I.  151 
+  9,960 
+  10,  170 
+  11,  740 

-  1.31S 
+    349 

-  2,020 
+  1.994 

-  1,062 
+  649 
+  4. 253 
+  2, 288 

-  3,993 

-  6,300 
+  7.376 
+  5.850 
-14,570 
+  10.086 
+  4.  159 
+  1,351 
+  823 
+  5, 206 
+  3.S13 
+  2, 777 
+  4.052 
+  5, 741 
+  3.370 
+  1,  181 

-  i,3S8 
+  11,  222 
+  2,691 

-  3. 419 

-  3.82s 

-  5,517 

-  4. 462 

-  9.  735 
+  11. 930 

-  2.560 

-  5.539 


—  2, 199 
+  15.604 
+  11,997 
+  3, SOI 

—  I,  130 

—  5. 297 

—  3, 233 

—  2. 248 

—  3.305 

—  S. 448 
+  I. 136 
+  1.549 

—  3.428 

—  7,904 
+  1.938 
+  17,995 

—  69s 

—  4,820 
+  3,816 
+   304 

—  1,960 
+  1,127 
+  2,942 
+  173 
+  4,  162 
+  I.  179 

—  8. 909 
+  3, 263 
+  11,  762 
+  3.346 

—  649 

—  9. 27s 

—  3-457 

—  2.788 

—  4.  369 

—  16,  408 
+    7.933 

+  12.  221 
+     3.926 


179 


National    Monetary     Commission 

Table  8. — Changes  in  the  holdings  of  the  Neiv  York  associated  banks  due 
to  the  action  of  the  subtreasury  and  the  interior  movement  of  money,  and 
also  the  changes  in  the  total  reserve — Continued. 

C.   FROM  JANUARY   s  TO   DECEMBER  31.    1906— Continued. 


Week  ending — 


Subtreasury 
action. 


Interior 
movement. 


Net  gain  (  +  ) 
or  loss  (  — ). 


Variation  in 
reserve. 


Oct.    s 

12 

19 

26 

Nov.   2 

9 

16 

23 

30 

Dec.   7 

14 

21 

28 


+  6,000 
+  I, 236 
+  3.500 
+    I. 000 

—  2. 500 
+  I . 000 

—  I , 000 

—  I . 100 

—  3. 000 

—  2,500 

—  1,000 
+  3.600 
+  2, lOI 


-  3. 

-  5. 


—  2, 
+  3 
+  2 

—  I 

—  I 
+  4 


439 
392 
279 
495 
232 
801 
oiS 
156 
31S 
411 
511 
533 
879 


+  2,561 

-  4,  156 

-  4, 779 

-  6, 495 

-  4,  732 

-  1,801 
+  2,015 

+  1,056 

-  4.315 

-  3. 911 
+  3. 511 
+  3.067 
+  5.980 


-  3. 797 
+  8.461 

-  3.934 

-  7.436 

-  7.342 

-  8.831 
+  2,817 
+  2,903 

-  2, 787 

-  12,  266 
+  I. 224 
+  6, 127 
+  4.  501 


It  appears  from  this  table  also  that  the  months  in  which 
the  banks  usually  gain  largely  from  the  subtreasury  do  not 
always  correspond  with  the  months  when  it  is  necessary  for 
them  to  have  the  largest  reserves.  The  times  of  the  year 
when  money  is  least  needed,  or  when  it  accumulates  in  the 
vaults  of  the  banks,  are  approximately  January,  the 
summer  months,  and  the  period  toward  the  end  of  October 
and  the  beginning  of  November. 

The  accompanying  Figure  8  shows  the  facts  graphically. 

Table  9,  with  accompanying  diagram  in  two  sections,  is 
presented  to  show  the  average  monthly  surplus  reserve  of 
the  New  York  clearing  house  banks  for  six  years,  1904- 
1909.  The  amount  of  surplus  reserve  given  in  the  table 
for  each  month  is  the  average  of  the  weekly  reserve  for 
that  month.  The  diagram  9a  represents  the  course  of  the 
reserve  through  the  whole  period,  while  96  is  constructed 


180 


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41969°— ID.     (To  face  piige  181.) 


Independent   Treasury  of  the    United   States 


from  the  averages  of  the  monthly  figures  for  the  six  years. 
Therefore  it  may  be  regarded  as  a  fair  presentation  of  the 
usual  course  of  the  surplus  reserve  under  conditions  such 
as  prevailed  in  those  years. 

Table   9. — The  average  monthly    surplus  reserve  of    New    York  clearing 
house  banks,  igo4—igogfl 

[Expressed  in  thousands  of  dollars.] 


January.. . 
February. . 
March  .  .  ,  . 

April 

May 

June 

July 

August .  .  . 
September 
October.  .  . 
November. 
December. 


19,  722 
25.469 
28,664 
29, 064 
19.562 
36,  161 
44.657 
57,507 
35.386 
16, 631 
9,  244 
12, 276 


21,69s 

13,682 

7.32s 

10, 962 

13.781 

9,545 

13,879 

10,836 

5,528 

9,877 

2,999 

2,  746 


1906. 


11,468 

6,  996 
5.  766 

7,  236 

8,  904 
8,804 

14.394 
8,446 
4,  736 
8,s8o 
2,  077 
339 


10,  703 

6,  180 

5,356 

14,836 

10,618 

6,  282 

6,520 

8,652 

7,08s 

4,313 

''50,304 

^34,558 


190S. 


568 
588 
503 
228 
047 
348 
748 
886 
973 
987 
555 
001 


25, 464 

II,  814 

14,  230 

11,333 

15,671 

22,  221 

33,923 

22,  091 

9,819 

10,  016 

7,683 

8,890 


Average. 


17,  103 
16, 121 
15,974 
20,  277 
21, 264 
23, 227 

27,  687 

28,  069 
19, 255 
14,  067 

209 
969 


o  Figures  compiled  from  the  Commercial  and  Financial  Chronicle. 
6  Deficit. 

The  table  emphasizes  the  well-known  fact  that  the 
bank  reserves  are  likely  to  increase  in  midsummer  and  be 
lowest  in  spring  and  fall.  The  figure  9 A  further  shows 
that  the  surplus  reserve  reached  its  lowest  points  in  May 
and  December  of  1904;  March,  November,  and  December 
of  1905;  March  and  December  of  1906;  March,  June,  and 
November  of  1907;  July  and  December  of  1908;  and 
April  and  November  of  1909.  The  period  from  the  late 
autumn  of  1904  until  the  time  of  the  panic  of  1907  was  a 
time  of  comparative  stability.  Section  B  of  the  diagram, 
as  remarked,  brings  out  the  course  of  the  average  reserve, 
according  to  the  preceding  data. 


National    Monetary     Commission 


Perhaps  enough  has  been  said  to  justify  the  statement 
that  evil  results  from  a  lack  of  correspondence  of  govern- 
ment receipts  and  disbursements  with  bank  needs  and 
seasons  of  ease.  The  evidence  may  be  strengthened, 
however,  by  a  glance  at  the  course  of  government  receipts 
and  disbursements  by  months.  In  order  to  bring  this 
out,  Tables  lo  and  ii  have  been  prepared.  Section  A  of 
Table   lo  shows  the  monthly  government  receipts  from 


aJAN.                  F€Q.               mar.                APft.                MAY                  JUNZ               JULY                 AOO,                 SCPT.                OCT.                 NOV.                 OCC 

10 

T 

o 

o 

& '» 

o 

s 
« 

/ 

— 

\ 

/ 

\ 

^_ 

_ 

/ 

\ 

\ 

\ 

Fig.  9B. — Monthly  movement  of  the  average  surplus  reserve  of  the  New  York  associated  banks 
for  six  years,  1 904-1 909,  inclusive. 


customs  only,  for  the  three  years  1888,  1889,  and  1891, 
with  the  average  for  each  month.  Section  B  of  the  same 
table  gives  the  total  ordinary  receipts  of  the  Government 
by  months  for  the  years  1908  and  1909,  with  the  average 
for  each  month.  Table  iiA  shows  the  disbursements  for 
the  three  years  with  the  average  for  each  month,  and  i  iB 
gives  the  disbursements  by  months  for  1908  and  1909, 
corresponding  with  Section  B  of  Table  10.     The  figures 


Independent   Treasury  of  the    United   States 


for  the  year  1890  have  been  left  out  because  they  were 
somewhat  anomalous. 

An  inspection  of  the  table  of  receipts  shows  that  they 
rise  through  the  summer.  This  means,  of  course,  that 
during  these  months  the  Treasury  is  locking  up  money 
and  contracting  the  currency.  Doubtless  the  banks  must 
have  found  relief  at  times  from  this  situation,  for  the 
Treasury  absorptions  have  withdrawn  part  of  the  money 
which  would  otherwise  have  lain  idle  in  their  vaults.  On 
the  other  hand,  it  may  at  times  have  weakened  them  in 
their  efforts  to  prepare  for  the  autumn  demand  for  money  • 
to  move  the  crops.  Indeed,  there  have  been  years,  of 
which  1890,  1902,  and  1903  are,  perhaps,  good  illustra- 
tions, in  which  the  necessary  ease  to  the  money  market 
has  come  entirely  from  government  disbursements.  One 
may  say  that  provision  for  "  moving  the  crops  "  has  become 
a  regular  part  of  the  banking  business  of  the  Treasury, 

Table  10. — Receipts  of  the  Government  from  customs,  by  months fl 

A. 
[Expressed  in  millions  of  dollars.] 


January.  .  . 
February. . 
March .... 

April 

May 

June 

July 

August .  .  . 
September. 
October .  .  . 
November. 
December . 


1891. 


Aver- 
age. 


"The  figures  are  from  the  Commercial  and  Financial  Chronicle. 
183 


National    Monetary     Commission 


Ordinary  receipts  of  the  Government,  by  months,  for  igoS  and  1909. 

B. 
[Expressed  in  millions  of  dollars.] 


January .  . 
February . 
March.  .  .  . 

April 

May 

June 

July 

August .  .  . 
September 
October .  . 
November 
December . 


1908. 


49-  4 

475 

48.3 

46.  7 

44-6 

S3-4 

43-9 

52.  1 

42.  7 

53-3 

S3S 

56-  9 

S2.  2 

57.6 

45 -3 

51.  I 

48.3 

523 

49-3 

57-  2 

48.0 

SI-  7 

SO.  3 

56.9 

Average. 


Table  ii. — Government  disbursements,  by  months. 

A.  1888-1891. 
[Expressed  in  millions  of  dollars.] 


1890. 


1891. 


Average 

for  the 

four  years. 


January . . 
Februarj- . 
March  .  .  .  . 

April 

May 

June 

July 

August .  .  . 
September 
October.  . 
November 
December . 


21.  9 
19.9 
iSS 
24.  9 
275 
16.6 
36.1 

22.  2 

19.  S 

32.  6 
36.6 
ISS 


26.6 
33.8 
17.0 
22.  5 
24.  4 
13-8 
42.  o 
38.3 
16. s 
28.6 
25-3 
259 


27.9 

25-   I 

17-  S 
29.  9 
27 .  2 
14.  9 
38.1 
33-9 
33-  7 
38.0 
42.  6 
21.9 


24.  o 
31-  7 
31S 
25-3 
29.8 
35-  9 
39-  7 
20.  7 
23 -9 
31  9 
27.9 
31.8 


25.  1 
27.  6 
20.  4 
25-  7 
22.  2 
20.3 
39-0 
28.8 
23-  4 
32.8 
33-  I 
31-7 


184 


Independent   Treasury  of  the    United   States 

JAN.        rCB.  MAft.  APR.         MAY  JUNC  JULY  AVt.  StPT.         OCT.  NOV.  OCC. 


20 

It 

la 

\ 

-i 

— 

— 

T 

\ 

17 
lb 

" 

\ 

/ 

' 

^'^ 

\ 

ts 

/ 

\ 

y 

Fig.  ioA. — Course  of  average  receipts  of  the  Government  from  customs  for  1888,  1889,  1891. 


•MW.         FEB         MAfi.         APR.        MAY        JUNE         JUVT         AUO.        S£PT.        OCT.         NOV.         DEC. 


Fig.  ioB. — Average  course  of  Government  receipts,  by  months,  1908-1909. 


185 


National    Monetary     Commission 

Table  ii. — Government  disbursements,  by  months — Continued 
B.  1908-1909. 


January . . 
February . 
March .... 

April 

May 

June 

July 

August .  .  . 
September 
October .  . 
November 
December . 


1908. 


Average. 


A  study  of  Table  1 1 ,  showing  the  disbursements  of  the 
Government,  gives  us  the  same  kind  of  information.  In 
Section  A  the  disbursements  have  been  large  in  October, 
November,  and  December,  and  small  in  March,  April, 
May,  and  June.  In  both  sections  of  the  table  July  is  the 
month  when  most  money  was  disbursed. 

The  plethora  of  currency  in  the  summer  is  due  (i)  to 
the  fact  that  any  national  bank  which  receives  on  deposit 
notes  of  another  bank  may  pay  them  out  again  in  the 
ordinary  course  of  business,  in  consequence  of  which  the 
notes  of  the  country  banks  are  not  sent  home  in  the  sum- 
mer ;  ( 2)  to  that  provision  of  the  law  whereby  the  deposits 
in  reserve  cities  count  as  reserve  both  for  the  reserve 
banks  and  for  the  country  banks  making  the  deposits; 
(3)  to  the  payment  of  interest  by  the  banks  on  deposits 
subject  to  call.  No  one  is  benefited  by  seasons  of  extreme 
ease;  for,  as  the  money  accumulates  in  New  York  when  it 
is  not  wanted  in  the  interior,  the  producing  mercantile 
classes  outside  of  New  York  get  no  benefit  from  the  low 


186 


Independent   Treasury  of  the    United    States 

rate  of  discount  which  the  accumulations  produce. 
When  a  stringency  occurs,  on  the  other  hand,  all  parts  of 
the  country  are  likely  to  be  affected.  The  injury  of  crises 
is  not  compensated  by  the  ease  of  the  money  market  at 
the  times  of  great  accumulation.  Figures  1 1  A  and  1 1  B 
show  the  data  of  the  corresponding  tables  graphically. 

There  have  been  times  when  the  autumnal  drain  would 
all  have  fallen  on  the  banks  but  for  the  subtreasury. 
Two  channels  were  open  for  the  Government  to  put  out 
its  accumulated  surplus:  The  purchase  of  bonds,  which 
was  the  usual  policy  in  the  autumn  for  some  years  before 
1890,  and  making  deposits  of  public  money  in  the  banks. 
With  a  rising  premium  on  United  States  bonds,  the  banks 
did  not  always  find  it  profitable  to  buy  them  in  order  to 
secure  government  deposits.  Relaxation,  in  recent  years, 
of  the  law  requiring  security  to  be  in  United  States  bonds 
only,  together  with  the  provision  that  customs  receipts 
also  may  now  be  deposited  in  banks,  has  changed  the 
situation  altogether,  so  that  depositing  in  the  banks  is 
now  the  usual  policy.  With  the  changes  in  the  law  and 
in  practice,  when  the  Government  has  a  surplus,  bond 
purchases  to  relieve  the  market  or  to  "move  the  crops" 
will  be  less  necessary. 

GENERAL  CONCLUSIONS  CONCERNING  THE  INFLUENCE  OF 
THE  INDEPENDENT  TREASURY  SYSTEM. 

The  two  important  and  striking  facts  brought  out  by 
study  of  these  tables  and  diagrams  are  the  irregularity  of 
the  operations  of  the  subtreasury  in  absorbing  and  dis- 
bursing   currency    and,    therefore,    in    contracting    and 


187 


National     Monetary     Commission 


•JAN.        FSB,        MAH  APR.        MAY         JUNE       JULY        AUO.        SEPT.         OCT.  NOV.        DEC. 


Fig.  1 1  a. — Average  course  of  Government  disbursements,  by  months,  1888-1892. 


wC4/V.      FEB.     MA/t.      APR.      t^AY      JONE    JULY       AUG.     SCPT.      OCT.       NOK         0£C. 


fa 

70 

0 

•J 

so 

lie 

\ 

\ 

\ 

\ 

K 

-^ 

\ 

\ 

/ 

^>^^ 



\ 

/ 

. 

N 

Fig.  I  iB. — Average  course  of  Government  disbursements,  by  months,  1 908-1 909. 

188 


Independent   Treasury  of  the    United   States 

expanding  the  currency  and  the  bank  reserves;  and,  sec- 
ond, the  lack  of  correspondence  between  the  periods 
between  subtreasury  disbursements  and  the  needs  of  the 
banks  as  well  as  between  subtreasury  absorptions  and 
periods  of  ease  on  the  part  of  the  banks. 

It  is  evident  that  there  is  no  necessary  connection 
between  subtreasury  supply  and  bank  need.  Sometimes 
the  two  movements  are  in  the  same  direction  and  some- 
times in  opposite  directions.  There  is  no  certainty  that 
the  subtreasury  movement,  whether  it  coincides  with  or 
antagonizes  the  demand  for  money  from  the  interior,  is 
in  the  best  direction  at  any  particular  time.  But  we 
must  remember  that  the  subtreasury  has  often  been  of 
great  advantage.  It  is  entirely  possible  that  without  it 
the  banks  might  have  experienced  at  times  greater  diffi- 
culty than  they  did.  But  the  pubHc  has  a  right  to  insist 
that  the  management  of  banks  shall  be  good  enough  to 
enable  them  to  meet  all  demands  upon  them.  If  the 
banks  had  not  been  accustomed  so  long  to  rely  upon  the 
subtreasury  for  relief,  they  might  be  better  able  them- 
selves to  take  measures  to  meet  the  regular  autumnal 
drain. 

So  great  an  irregularity  as  the  data  show  can  not  but 
have  a  tendency  to  make  prices  irregular  too.  The  effect 
of  the  spasmodic  variations  shows  itself  first  in  the  price 
of  securities,  and  some  people  are  inclined  to  take  the 
view  that  fluctuations  in  the  market  for  securities  are 
matters  that  concern  speculators  only  and  need  not  cause 
anxiety  to  the  people  at  large.  This,  however,  is  too  nar- 
row a  view  of  the  situation.  Whatever  criticism  may 
fairly  be  made  against  the  merely  speculative  element  of 


N  a  t  i  0  n  a  I     M  o  n  e  t  ar  y     Commission 

the  securities  market,  it  yet  is  true  that  the  fluctuations  of 
that  market  have  an  important  and  far-reaching  influence 
on  the  ordinary  business  of  the  country.  Manufacturers 
and  merchants  are  interested  in  the  price  of  securities, 
although  they  do  not  speculate  in  them.  The  business 
man  with  a  surplus  of  money  in  a  dull  season  finds  it  to 
his  advantage  to  invest  it  in  good  securities.  When  his 
business  becomes  brisk  again  he  borrows  at  his  bank  and 
may  pledge  his  securities  as  collateral.  If  from  any  cause 
the  price  of  his  bonds  or  stocks  fluctuates  violently  he  may 
suffer  a  loss  and  may  be  obliged  to  provide  additional 
security  and  thereby  strain  his  resources  when  he  needs 
them  most.  Under  some  conditions  the  business  man 
who  has  borrowed  may  be  compelled  to  reduce  his  capital 
or  lessen  his  expenses  or  sell  his  goods  at  a  loss.  More- 
over, we  must  not  forget  that  the  speculation  which  is  so 
much  and  so  properly  criticised  may  be  stimulated,  if  not 
caused,  by  an  inopportune  disbursement  from  the  sub- 
treasury  itself. 

For,  as  we  have  already  remarked,  the  influence  of  the 
treasury  absorptions  and  disbursements  of  money  on 
prices  is  not  a  direct  one.  It  shows  itself  through  alternate 
enlargement  and  lessening  of  the  bank  reserves,  with  con- 
sequent changes  in  the  rate  of  discount.  As  is  well  under- 
stood, a  vast  volume  of  business  transactions  is  based 
on  credit;  that  is  to  say,  the  funds  for  them  are  borrowed 
bank  deposits  resting  directly  upon  the  cash  reserves  of 
the  banks.  It  is  hardly  necessary  to  lay  emphasis  on  the 
volume  of  transactions  settled  with  credit  documents 
supported  in  one  way  or  another  by  this  reserve.     The 


190 


Independent   Treasury  of  the   United   States 

volume  of  loans  and  discounts  in  the  national  banks 
alone,  on  March  29,  19 10,  was  $5,432,093,194.  This  great 
volume  of  credit  transactions  rested  on  a  reserve  of 
$661,799,771  in  specie  and  $173,095,815  in  legal-tender 
notes.  But  this  statement  does  not  present  the  situa- 
tion completely.  The  bank  reserves  of  the  city  of  New- 
York  and  of  the  other  central  reserve  cities  include  part 
of  the  reserves  of  banks  in  other  places.  Under  the 
national  banking  law,  as  is  well  known,  banks  in  places 
other  than  reserve  cities  are  permitted  to  count  as  part  of 
their  reserve  some  of  their  deposits  with  their  correspond- 
ent banks  in  the  reserve  cities.  But  the  banks  in  the 
reserve  cities  discount  on  the  basis  of  these  deposits.  It 
is  evident,  therefore,  that  the  reserves  of  the  banks  in  the 
central  reserve  cities  support  not  only  the  discounts  of 
these  banks  themselves,  but,  in  large  measure,  the  dis- 
counts of  the  country  banks  also.  But  the  situation  is 
even  more  delicate  than  the  facts  thus  far  would  show. 
In  practice,  not  only  the  national  banks  outside  of  the 
reserve  cities,  but  also  other  banking  institutions,  follow 
this  practice  of  keeping  part  of  their  reserves  with  banks 
in  reserve  cities.  Doubtless  there  are  many  banking 
institutions  which  keep  practically  the  whole  of  their 
reserves  in  the  reserve  city  banks.  Consequently,  the 
reserves  of  the  banks  in  these  cities,  particularly  in  New 
York,  is,  in  a  real  sense,  the  reserve  of  all  the  banks  of 
the  country.  It  is  clear,  therefore,  when  we  consider 
the  vast  superstructure  of  credit  that  rests  upon  the 
reserves,  that  any  influence  exerted  upon  the  reserves 
in  the  central  reserve  cities  is  likely  to  have  far-reaching 


191 


National    Monetary     Commission 

immediate  consequences  upon  the  business  of  the 
country. 

The  safety  and  value  of  the  whole  credit  system  depends 
upon  the  maintenance  of  an  adequate  reserve.  The 
reserve  is  not  adequate  unless  it  is  large  enough  not  only 
to  meet  all  demands  upon  it  but  to  remove  all  apprehen- 
sion that  it  may  not  be  able  so  to  do.  Unless  confidence 
in  this  respect  can  be  established  in  the  minds  of  the 
public,  the  whole  credit  system  is  impaired.  Any  diminu- 
tion of  the  bank  reserve,  without  a  corresponding  decrease 
of  credit,  or  any  check  on  its  expansion  when  the  needs 
of  business  require  an  enlargement  of  credit,  interferes 
with  operations  in  every  line  of  business  activity.  In 
other  words,  so  small  relatively  is  the  bank  reserve  that 
a  comparatively  slight  change  in  its  amount  may  check 
the  whole  market.  The  banks  in  reserve  cities  are 
required  by  law  to  keep  a  minimum  reserve  of  25  per 
cent  of  their  deposits  in  coin  and  United  States  notes. 
This,  then,  represents  the  danger  line  in  fluctuations  of 
reserve.  Even  an  approach  to  it  creates  anxiety  and 
distress  in  business. 

The  amount  of  reserve  necessary  depends  partly  upon 
the  amount  of  cash  deposits,  but  more  upon  the  volume 
of  discounts.  For  a  borrower  at  a  bank  seldom  cares  to 
withdraw  the  actual  money.  He  borrows  credit.  The 
amount  of  the  loan  is  credited  to  him  on  the  books  of  the 
bank,  and  he  draws  on  it  as  he  needs  it.  No  more  money 
comes  into  the  bank  by  this  transaction;  no  money  at  all 
need  pass  from  the  bank  to  the  borrower  from  the  time  of 
the  contraction  of  the  debt  to  that  of  its  liquidation.     Yet 


192 


Independent   Treasury  of  the   United  States 

the  transaction  is  equivalent  to  an  increase  of  deposits, 
and  necessitates  an  increase  of  reserve.  If  the  reserve  of 
the  bank  is  already  at  the  legal  minimum,  the  bank  must 
get  more  money;  if  it  can  not  do  so,  it  must  contract  its 
loans  or  refuse  further  discounts,  thus  checking  the 
market.  Money  which  is  drawn  from  the  banks  must 
come  out  of  the  reserve  or  cash  actually  on  hand.  The 
withdrawal  of  any  sum  of  money  from  the  banks  diminishes 
the  reserve  in  a  ratio  larger  than  that  which  the  amount 
withdrawn  bears  to  the  total  deposit  account.  But  if  the 
amount  withdrawn  is  kept  in  the  current  of  business,  where 
the  banks  can  get  at  it,  they  can  strengthen  their  position 
again  immediately.  If,  however,  they  can  not  recover  the 
money  let  out,  every  withdrawal  brings  them  nearer  to 
the  danger  line  of  the  legal  minimum  reserve.  Money 
withdrawn  from  the  banks  for  export,  or  to  be  locked  up 
in  the  sub  treasury,  is  put  out  of  reach  of  the  banks  for  a 
time  at  least. 

The  banks  of  the  central  reserve  cities  are  subjected 
each  year  to  periodical  drains  from  the  interior  to  sow  in 
the  spring  and  to  move  the  crops  in  the  fall.  Between 
times  they  ordinarily  have  high  surplus  reserves  and  the 
discount  rate  is  low.  Under  a  good  currency  and  bank- 
ing system  the  banks  would  not  be  subjected  to  a 
strain  on  their  reserves  at  the  times  when  the  demand 
from  the  interior  is  heavy;  nor  to  an  influx  from  the 
subtreasury  at  times  when  money  is  returning  from  the 
interior.  That  they  do  undergo  these  experiences,  how- 
ever, the  data  in  the  tables  and  diagrams  presented  show 
very  fully. 

41969°— lo 13  193 


National     Monetary     Commission 

The  diminution  of  the  bank  reserves  by  the  subtreasury 
diminishes  the  money  basis  of  credit  and  thereby  at  times 
makes  credit  more  difficult  to  obtain;  but  at  the  same 
time  the  withdrawal  of  money  from  circulation  necessitates 
a  larger  resort  to  credit  in  the  attempt  to  prevent  the 
reduction  of  business  transacted.  That  is,  since  one  part 
of  the  purchasing  medium  is  diminished,  the  other  must 
enlarge  to  maintain  the  same  volume  of  business.  Thus 
the  tendency  of  the  action  of  the  subtreasury  is  to  diminish 
one  basis  of  business  activity — the  money  available  for 
loans — and  so  to  compel  a  resort  to  the  other  basis — 
credit;  while  at  the  same  time,  and  by  the  same  action, 
it  reduces  the  basis  for  granting  credit.  The  result  is  a 
check  on  business  expansion,  perhaps  an  actual  reduction 
of  business  activity. 

It  is  sometimes  said  that  if  the  Government  would  pay 
its  debts  so  as  to  avoid  having  a  surplus  on  hand,  the  evil 
efifects  of  the  independent  treasury  in  alternately  contract- 
ing and  expanding  the  currency  would  not  occur.  This 
statement  is  hardly  correct,  because  it  overlooks  the 
characteristic  feature  of  the  system,  which  is  its  irregu- 
larity of  action.  The  receipts  of  the  Government  flow  into 
its  vaults  in  a  continuous  stream,  while  payments  are 
periodic.  It  receives  money  every  day,  but  the  bulk  of 
its  payments  is  made  every  three  months.  It  must  gather 
beforehand  a  sufficient  amount  to  meet  its  payments. 
That  means  that  for  three  months  money  is  being  with- 
drawn from  circulation,  and  that  at  the  end  of  the  quarter 
it  is  thrown  back  into  circulation  and  into  the  banks  all, 


194 


Independent   Treasury  of  the    United   States 

or  nearly  all,  at  once.  In  this  irregularity  •*  of  action  on 
the  money  market  lies  the  harm  of  the  system.  If  it  be 
said  that  the  payments  made  by  the  Government  at  the 
end  of  every  three  months  amount  to  a  small  sum  com- 
pared with  the  total  circulating  medium,  and  therefore 
can  not  have  any  important  effect  on  business,  the  argu- 
ment is  conclusively  answered  by  the  evidence  of  experi- 
ence. It  can  not  be  admitted  that  the  disbursements  of 
the  Government  are  so  insignificant  as  the  statement 
seems  to  assume.  To  assert  that  such  changes  in  the 
available  amount  of  loanable  funds  as  Treasury  operations 

»  As  long  ago  as  1882,  the  Secretary  of  the  Treasury,  Mr.  C.  J.  Folger, 
emphasized  this  point,  in  his  report  for  that  year.  He  emphasizes  too 
strongly,  perhaps,  the  power  of  "cliques"  in  the  money  market;  but  these 
certainly  have  been  at  times  powerful  for  evil,  and  their  power  has  been 
increased,  if  not  at  times  made  possible,  by  the  influence  of  the  independent 
treasury  on  the  currency.     Secretary  Folger  wrote: 

"From  the  inequality  between  daily  large  receipts  and  comparatively 
small  daily  disbursements  there  comes  an  evil  effect  upon  the  business  of 
the  country.  The  collections  by  the  Government  are  taken  out  of  the 
money  market  in  sums  and  at  dates  which  have  little  or  no  agreement 
with  the  natural  movement  of  money,  and  are  returned  to  it  with  the  same 
inadaptation  to  commercial  or  financial  requirements.  Occasionally  the 
large  disbursements  of  the  Government  have  created  a  plethora  of  money ; 
more  frequently  its  large  and  continued  withdrawals  of  money  have  caused 
such  a  scarcity  of  floating  capital  as  to  check  the  proper  movement  of 
legitimate  business.  It  is  not  only  that  the  amount  in  the  Treasury  is  so 
much  kept  from  the  use  of  [the]  community ;  the  fact  becomes  an  incentive 
and  an  aid  to  men  who  for  their  own  ends  conspire  to  keep  from  that  use 
other  large  sums  *  *  *_  To-day  there  are  men  so  rich  that  by  conspiring 
together,  they  can  at  will  put  and  hold  hand  on  near  as  much  money  as 
Government  can  lay  hand  to,  save  by  the  use  of  its  credit.  The  power 
thus  had  is  used  from  time  to  time.  It  results  that  sudden  and  violent 
contractions  and  expansions  afilict  the  business  community,  and  the 
Government  is  an  unwilling  aider  and  abettor  therein.  It  has  come  about 
that  the  Treasury  Department  is  looked  to  as  a  great,  if  not  a  chief  cause 
of  recurring  stringencies,  and  the  Treasury  is  called  to  for  relief." 

Similar  remarks  have  been  made  by  other  Secretaries. 


195 


National     Monetary     Commission 

cause  will  not  materially  affect  business,  is  to  assume  that, 
other  things  being  equal,  the  rate  of  interest  in  the  money 
market  will  not  vary  with  the  amount  accessible  to  bor- 
rowers, and  that  the  banks  will  voluntarily  keep  idle  in 
their  vaults  more  money  than  is  necessary  for  conservative 
banking. 

But,  to  repeat  what  has  already  been  said,  even  a  small 
change  in  the  amount  of  money  available  for  reserves 
may  have  an  important  influence  on  the  market,  especially 
if  bank  reserves  are  very  near  the  legal  minimum;  for 
contraction  then,  though  apparently  insignificant  in 
amount,  may  produce  a  most  violent  reaction  in  prices, 
disturbance  in  settlements,  and  disorder  in  almost  every 
part  of  business  activity. 

Some  years  ago  the  banks  of  the  country  took  alarm, 
whether  reasonably  or  not,  at  some  proposed  congres- 
sional legislation  which,  in  their  judgment,  would  affect 
the  value  of  United  States  bonds.  Banks  generally  took 
measures  immediately  to  recall  the  bonds  deposited  with 
the  Treasurer  of  the  United  States  as  security  for  their 
circulating  notes.  To  do  so  they  drew  on  their  New 
York  balances  for  legal-tender  notes  and  ordered  them 
sent  to  the  Treasurer  at  once.  The  amount  of  legal  ten- 
ders thus  withdrawn  from  the  bank  reserves  in  New  York 
City  in  one  week  was  about  $17,000,000,  out  of  a  total 
circulation  of  all  kinds  aggregating  nearly  $1,100,000,000. 
The  demand  caused  a  sudden  contraction  of  the  discounts 
of  the  New  York  banks,  followed  by  a  fall  in  the  price  of 
securities,  which  had  to  be  sacrificed  by  borrowers  who 
could  not  replace  their  loans.     The  result  was  a  loss  of 


196 


Independent   Treasury  of  the    United   States 

fully  $200,000,000  in  the  aggregate  value  of  securities  in 
the  New  York  market  within  the  week.« 

In  addition  to  the  bad  influence  of  the  irregularity  of 
the  working  of  the  independent  treasury,  harm  arises 
from  the  system  in  connection  also  with  the  policy  of  sur- 
plus financiering.  By  that  policy  a  large  amount  of 
money  collected  in  excess  of  the  expenses  of  the  Govern- 
ment is,  in  effect,  withdrawn  from  circulation.  If  the 
Government  has  a  surplus  every  month,  a  part  of  it,  at 
least,  must  be  continuously  in  the  possession  of  the  Gov- 
ernment. The  effect  is  the  same  as  if  so  much  money 
were  withdrawn  from  circulation  permanently.  The 
result  must  be  that  the  country  accommodates  itself  to  this 
new  monetary  basis  by  a  temporary  fall  of  prices,  unless 
the  circulating  medium  is  increasing  under  the  influence 
of  additional  coinage  with  sufficient  rapidity  to  prevent 
the  fall.  To  be  sure,  to  have  a  surplus  is  not  a  feature  of 
the  independent  treasury  system.  The  continual  hold- 
ing of  a  surplus  by  the  Government  is  a  policy,  not  a 
system.  But  if  a  surplus  were  by  some  means  kept  in 
circulation,  subject  to  the  call  of  the  Government,  the 
evils  of  hoarding,  at  least,  would  be  avoided.  It  is 
because  it  makes  hoarding  in  the  government  vaults  pos- 
sible that  the  subtreasury  system  adds  to  the  evils  of 
surplus  financiering. 

FACTORS  WHICH  HAVE  MODIFIED  THE  INFLUENCE  OP  THE 
INDEPENDENT  TREASURY. 

The  operations  which  have  been  described  are  those 
which  would  result  under  a  system  of  government  fiscal 

o  See  W  M.  Grosvenor,  American  Securities,  2i6ff. 
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National     Monetary     Commission 

independence,  with  disbursements  made  at  considerable 
intervals,  and  with  no  reference  to  the  condition  of  the 
money  market  or  the  demands  of  business.  Such  in 
principle  is  the  independent  treasury  system  of  the 
United  States.  But  the  existence  of  the  public  debt  and 
the  almost  constant  possession  of  a  surplus  revenue  have, 
under  wise  management  by  the  various  Secretaries  of  the 
Treasury,  made  it  possible  to  prevent  the  occurrence  of 
very  serious  disturbances  from  the  influence  of  the  sys- 
tem. If  this  influence  had  been  unchecked,  there  is  no 
reason  to  think  that  the  results  would  have  been  less  evil 
than  the  opponents  of  the  system  prophesied  at  its  incep- 
tion. But  there  have  been  forces  at  work  that  have  les- 
sened the  evils.  The  policy  of  the  country  in  other  lines, 
although  these  have  been  followed  without  any  refer- 
ence to  the  independent  treasury,  has  been  such  as  to 
prevent  the  system  from  bearing  what  would  be  its  legiti- 
mate fruits  if  unchecked.  The  times  of  largest  receipts 
from  customs  and  of  largest  pa)^ments  of  interest  and 
pensions,  the  currency,  the  silver  purchases,  and  the 
tariff,  have  all  modified  the  working  of  the  system  of 
fiscal  independence  to  a  greater  or  less  extent.  It  has 
happened  that  some  of  these  influences  have  prevented 
or  lessened  any  evils  that  the  subtreasury  might  have 
caused. 

In  the  first  place,  the  tariff  and  the  independent  treas- 
ury have  had  a  certain  connection.  Until  1907  receipts 
from  customs  could  not,  according  to  law,  be  deposited 
in  the  banks.  When,  therefore,  imports  which  are  sub- 
ject to  taxation  were  heavy,  considerable  money  was 
locked  up.     This,  of  course,  if  continued  for  a  consider- 

198 


Independent   Treasury  of  the   United   States 

able  period,  and  if  disbursements  did  not  increase,  would 
diminish  the  means  of  paying  duties,  and  might  strongly 
affect  the  money  market  and  disarrange  credit. 

The  two  institutions,  tariff  and  independent  treasury, 
are  to  a  certain  extent  antagonistic,  in  so  far,  at  least,  as 
the  tariff  is  for  the  purpose  of  raising  revenue.  For  by 
locking  up  the  customs  receipts  of  one  week,  and  thereby 
reducing  the  money  within  reach  for  further  payments, 
the  subtreasury  will  tend  to  check  an  importation  move- 
ment sooner  than  it  would  cease  if  our  currency  varied 
with  the  needs  of  business.  So  far,  however,  as  the 
tariff  is  intended  to  check  importation,  so  far,  that  is,  as 
it  is  purely  protective,  its  purpose  harmonizes  with  the 
action  of  the  independent  treasury. 

It  has  already  been  observed  several  times  that  there 
is,  strictly  speaking,  no  casual  connection  between  the 
workings  of  the  financial  machinery  of  the  Government 
and  the  demand  of  business  for  money.  Yet,  strangely 
enough,  the  ill  effects  of  the  receipts  and  payments  of  the 
Government,  in  alternately  contracting  and  enlarging  the 
amoimt  of  money  available  for  business  purposes,  have 
been  modified,  and  to  a  certain  extent  diminished,  by  our 
peculiar  currency  system.  Bad  as  that  system  is  in  some 
respects,  it  must  be  credited  with  some  good  in  this  direc- 
tion. The  chief  defect  of  our  monetary  system  is  its 
inelasticity.  The  supply  of  money  in  the  channels  of 
trade  is  that  which  is  needed  when  business  is  brisk  and 
the  demand  for  money  is  active  and  healthy.  But  there 
is  not  what  might  be  called  an  automatic  method  of  con- 
traction whereby  the  amount  of  money  in  circulation 
quickly  and  easily  becomes  less  when  business  becomes 

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National     Monetary     Commission 

dull  for  short  periods.  Our  circulating  medium  is  com- 
posed of  gold  and  silver  coins  and  certificates,  United 
States  notes,  and  national  bank  notes.  The  United 
States  notes,  or  greenbacks,  are  by  law  fixed  in  amount; 
the  gold  would  ordinarily  diminish  only  by  export  for 
investment  or  for  the  settlement  of  international  balances, 
and  is  not,  therefore,  contractible  on  the  occasions  under 
consideration;  and  the  national-bank  notes  which  of  late 
years  have  considerably  increased  in  volume,  grow  less 
only  by  slow  redemption  as  they  wear  out,«  or  banks  retire 
them.  There  is,  then,  abundant  provision  for  currency 
expansion,  but  little  for  currency  contraction.  The  prin- 
cipal means  whereby  this  process  can  take  place  is  through 
the  absorption  and  locking  up  of  money  by  the  Govern- 
ment. Although  this  mode  is  purely  arbitrary,  it  some- 
times happens  that  the  Government  locks  up  money  at  a 
time  when  there  is  a  plethora  in  the  market.  The  process 
can  not  then  do  much,  if  any,  injury;  in  fact,  it  may  be  a 
source  of  relief  to  the  banks.  The  inelasticity  of  the  cur- 
rency implies  a  social  loss,  by  keeping  afloat  at  times  a 
larger  amount  of  money  than  is  necessary;  but,  on  the 
other  hand,  it  lessens  the  severity  of  contraction  by  the 
Treasury. 

Between  1880  and  1890  another  preventive  of  strin- 
gency in  the  fall  was  found  in  the  proper  timing  of  the 
heavy  payments  of  pensions  and  interest.  Disbursements 
for  these  purposes  often  swelled  at  times  when  they  could 
do  great  good.  The  pensions  and  the  interest  on  the  4K 
per  cent  bonds  of  189 1  were  payable  in  March,  June,  Sep- 

ffl  Of  course  the  final  retirement  of  the  national  bank-notes  is  not  a  phase 
of  the  elasticity  of  the  currency  here  intended. 


Independent   Treasury  of  the    United   States 

tember,  and  December,  and  were  a  source  of  monetary 
relief  that  could  be  depended  on.  The  interest  on  the  4 
per  cents  was  paid  in  January,  April,  July,  and  October. 
So  far  as  the  influence  of  these  payments  was  concerned, 
that  of  October  would  continue  the  relief  afforded  by  the 
September  payments.  When  the  ^^4  per  cent  bonds  had 
been  paid  there  was,  of  course,  no  further  relief  from  these 
interest  payments  in  September.  But  after  the  redemp- 
tion of  these  bonds  it  happened  that  the  financial  condition 
of  the  Government  changed.  The  receipts  from  customs 
fell  off  owing  to  the  high  rates  of  the  McKinley  tariff  law, 
and  the  expenditures  largely  increased,  thus  reducing  the 
surplus  and  making  income  and  outgo  more  nearly  equal. 
The  equalization  of  payments  and  receipts  in  the  course 
of  a  year,  however,  as  we  have  seen,  did  not  prevent  the 
financial  operations  of  the  Government  from  exerting  an 
influence  on  the  money  market.  For  it  was  still  necessary 
for  the  Treasury  to  accumulate  in  advance  a  sufficient 
amount  of  money  to  make  payments  of  interest  and  pen- 
sions quarterly.  The  irregularities  of  its  operations  due  to 
the  public  debt  were  not,  indeed,  as  great  as  before,  yet 
they  were  sufficient  to  cause  occasional  disturbance.  The 
only  interest  payments  of  importance  were  those  on  the 
4  per  cent  bonds,  due  in  January,  April,  July,  and  October 
of  each  year.  The  January  payments  came  at  a  time  when 
the  demand  for  money  slackened,  and  so  money  accumu- 
lated for  a  time  in  the  banks,  as  shown  by  the  increase  in 
their  reserves.  The  April  disbursements  coincided  usu- 
ally with  the  demand  for  money  for  the  spring  trade,  and 
thus  were  a  help  to  the  market.  The  outpour  of  July  fell 
on  a  lethargic  market  and  went  to  swell  bank  reserves 


National     Monetary     Commission 

already  usually  larger  than  the  banks  desire  at  that  season 
of  the  year.  The  October  payment,  as  we  have  already 
noted,  was  timely  in  meeting  the  usual  "fall  demand." 
But  this  aid  was  merely  a  temporary  and  incidental  mat- 
ter, and  had  no  relation  either  to  permanent  fiscal  policy, 
a  correct  currency  system,  or  sound  banking. 

A  surplus  revenue  has  prevented  the  independent  treas- 
ury from  exerting  the  full  efi"ect  which  it  would  otherwise 
have  had.  While  the  surplus  is  to  a  certain  extent  charge- 
able with  intensifying  the  contractions  which  the  opera- 
tion of  the  Treasury  at  times  tends  to  produce,  it  also 
afforded  a  means  of  relief  when  the  acute  stage  of  the 
demand  for  money  came.  Without  the  pubUc  debt  and 
without  a  surplus  to  redeem  it,  the  Treasury  could  not  have 
afforded  the  help  in  stringencies  which  it  has  so  often 
given.  But  this  very  cure  of  the  evils  of  contraction  may 
be,  to  a  certain  extent,  its  cause.  For  a  surplus  can  exist 
only  because  money  is  taken  out  of  circulation  and  locked 
up  for  future  use,  a  process  which  means  contraction. 

If  the  bank  currency  of  the  country  were  wholly  created 
by  commerce  for  its  own  needs,  adapted  entirely  to  those 
needs,  and  possessing  the  elasticity  which  a  currency 
should  have,  the  action  of  the  independent  treasury  would 
be  more  clearly  seen.  The  new  coinage  made  in  response 
to  commercial  demand,  and  the  export  and  import  of  gold 
and  silver,  would  still  have  to  be  allowed  for;  but  the 
alternate  issue  and  redemption  of  bank  ftotes  under  such 
a  currency  system  as  we  suppose  would  respond  quickly 
to  the  variation  in  the  demand  caused  by  the  sub  treasury, 
and  so  would  reflect  its  action  much  more  clearly. 


Independent   Treasury  of  the    United   States 

The  independent  treasury  also  enhances  the  difficulty  of 
the  management  of  the  public  debt.  The  Secretary  of  the 
Treasury  must  proceed  carefully  so  as  to  prevent  the  with- 
drawal of  too  much  money  for  the  accumulations  from 
which  to  pay  interest  and  to  ptuchase  bonds  for  the  sinking 
fimd.  He  must  make  his  withdrawals  and  disbursements 
as  equable  as  possible. 

The  independent  treasury,  in  connection  with  a  surplus 
revenue,  has  been  responsible  for  a  policy  of  forced  debt 
payment.  When  the  surplus  has  grown  large  the  Secre- 
tary of  the  Treasury  has  been  compelled  to  get  rid  of  some 
of  it  by  purchasing  bonds,  even  though  he  had  to  pay  large 
premiums  to  do  so.  This  policy  has  long  been  followed, 
especially  on  the  occurrence  of  the  autumn  stringencies. 
The  principal  occasions  will  be  mentioned  in  discussing  the 
relation  of  the  independent  treasury  to  crises.  One  result 
of  such  purchases  is  to  raise  the  price  of  the  bonds  so  that 
it  may  not  pay  the  banks  to  deposit  them  as  security  for 
circulation;  and  the  consequence  not  infrequently  is  a 
retirement  of  bank  notes  and  a  contraction  of  the  cur- 
rency, or  a  prevention  of  its  expansion  when  needed. 

The  causes  which  have  modified  the  action  of  the  sub- 
treasiury  have  prevented  the  monthly  variations  in  the  net 
government  holdings  of  cash  from  corresponding  neces- 
sarily with  the  gains  or  loss  of  money  to  business  from 
government  operations.  Hence,  one  set  of  changes  can 
not  always  be  learned  from  the  other.  The  difference 
between  the  two  sets  of  changes  is  often  increased  by  the 
fact  that  the  disbursements  reported  as  being  made  in  one 
month  may  not  appear  until  the  following  month.     The 


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National     Monetary     Commission 

checks  issued  for  pensions,  for  example,  are  some  time  in 
returning  through  the  banks  to  the  subtreasury  for  pay- 
ment. Meantime  the  money  against  thCm  remains  still 
in  the  vaults  of  the  Treasury.  The  effect  of  large  reported 
disbursements  or  absorptions  may  not  appear,  therefore, 
for  some  little  time  after  they  are  nominally  made. 

We  see,  then,  that  the  evils  which  the  subtreasury  might 
have  been  expected  to  produce  have  often  been  neutral- 
ized by  lucky  accidents,  as  it  were;  for  it  can  hardly  hv 
claimed  that  the  various  parts  of  our  financial  system  and 
policy  have  been  framed  with  reference  to  one  another  so 
as  to  offset  one  another's  ill  effects  and  produce  a  system 
good  on  the  whole.  Irregularities  of  absorption  and 
disbursement  can  not  be  prevented.  They  occur  with  all 
governments.  It  is  not  practicable  for  the  Government 
to  pay  its  bills  with  sufficient  frequency  to  prevent  the 
locking  up  of  considerable  sums  for  periods  long  enough 
to  affect  the  market,  especially  when  it  is  sensitive.  This 
feature  of  temporary  withdrawals  of  money  is  inherent  in 
the  "  independent  "  system  of  government  management  of 
its  own  receipts,  and  renders  impossible  the  prevention  of 
the  evils  which  arise  from  contractions  and  expansions  of 
the  currency  that  are  independent  of  the  state  of  trade. 

It  may  be  said  that  recent  legislation  whereby  the  gov- 
ernment receipts  from  customs  may  be  deposited  in  the 
banks,  in  addition  to  the  internal -revenue  receipts,  suffi- 
ciently restores  to  circulation  the  money  received  in 
taxes,  and  that  the  abolition  of  the  independent  treasury 
system  is  not  now  necessary.  If  the  Secretary  of  the 
Treasury  takes  full  advantage  of  his  discretion  in  this 


204 


Independent   Treasury  of  the    United   States 

respect,  the  evil  of  Treasury  independence  would  be  much 
lessened,  but  not  wholly  removed.  For,  at  present,  the 
Secretary  must  withdraw  his  deposits  and  put  the  money 
in  a  subtreasury  in  order  to  use  it  to  pay  the  creditors  of 
the  Government.  If,  instead  of  being  required  to  do  so,  he 
were  permitted  to  receive  checks  whenever  tendered,  and 
to  check  against  his  accounts  with  the  banks,  the  condi- 
tions would  be  still  farther  improved. 

In  defense  of  the  subtreasury  system  it  has  been  said 
that  there  must  be  a  source  of  supply  of  specie  some- 
where in  the  country,  and  the  Government  might  as  well 
keep  it  as  the  banks. ^  To  the  first  half  of  this  statement 
no  one  can  object.  This  reserve  of  specie  is  provided 
for  in  different  countries  in  dift'erent  ways.  Of  course,  in 
all  cases  the  banks  provide  some  of  it.  Some  countries 
prefer  to  have  a  large  part  of  it  in  active  circulation.  It 
has  been  said  that  the  metallic  currency  of  Great  Britain 
is  a  reservoir  from  which  the  banks  are  able  to  replen- 
ish their  resources  to  a  considerable  extent  in  times  of 
stringency. 

Our  people  pursue  the  opposite  course ;  we  prefer  paper 
money  and  checks  to  so  great  an  extent  that  we  have  no 
reserve  of  this  kind  when  a  pinch  comes.  "If  by  means 
of  checks  and  post-office  savings  banks  and  small  notes 
and  all  such  methods  we  diminish  the  reserve  gold  circula- 
tion in  the  hands  of  the  people,  then  we  lose  security  in 
critical  times  and  we  find  ourselves  in  the  situation  of 
having  our  whole  coinage  system  rest  on  nothing  but 

o  Bankers'  Magazine,  November,  1890. 


205 


National     Monetary     Commission 

paper."  «  We  subject  ourselves  to  this  danger.  For  that 
reason  it  is  more  necessary  to  provide  a  store  of  specie  in 
the  banks. 

To  the  second  part  of  the  remark,  that  the  supply  of 
gold  may  as  well  be  kept  by  the  Government  as  the 
banks,  objection  may  be  made,  because  there  is  no  rela- 
tion between  the  amount  that  the  Government  keeps  and 
the  amount  needed  by  business.  The  amount  which  the 
Government  keeps  depends  upon  its  revenue.  If  the 
revenue  falls  off  the  amount  of  specie  diminishes,  unless 
the  Government  deliberately  makes  its  Treasury  to  a 
greater  or  less  degree  a  bank  of  issue.  Indeed,  no  Gov- 
ernment can  properly  keep  the  specie  reserve  of  a  country 
unless  it  does  this.  Moreover,  the  Government  reserve  is 
uncertain,  not  only  in  amount,  but  in  time  of  collection 
and  in  disbursement.  As  we  have  seen  in  oiu:  study  of 
the  subtreasury  operations,  an  independent  government 
reserve  may  be  lacking  when  it  is  most  needed,  and  abun- 
dant when  it  is  unnecessary.  The  proper  agents  to  pro- 
vide the  reserv'-e  are  the  banks.  They  do  a  commercial 
business  and  can  protect  the  specie  reserve  by  changing 
the  rate  of  discount,  a  course  which  is  not  open  to  the 
Government  at  all. 

When  the  power  to  receive  checks  and  to  check  against 
bank  deposits  is  conferred  on  the  Secretary,  then,  indeed, 
the  repeal  of  the  independent  treasury  law  will  hardly  be 
necessary.  For  the  various  amendments,  made  in  recent 
years,  which  permit  the  use  of  the  banks  for  practically 

«  Remark  of  Doctor  Arendt,  Rept.  of  National  Monetary  Com.,  German 
Bank  Inquiry  of  1908  (stenographic  report);  Doc.  407,  6ist  Cong.,  2d 
sess.,  p.  531. 

206 


Independent   Treasury  of  the    United   States 

all  the  business  of  the  Government,  have  already  virtually 
abolished  the  system.  It  has  been  repealed  piecemeal. 
The  fact  that  it  has  been  so  repealed,  that  step  by  step 
the  separation  of  the  Treasury  and  the  banks  has  been 
done  away  with  by  special  legislation,  is  the  best  of  evi- 
dence that  this  separation  was  felt  to  be  injurious  to  the 
business  of  the  country.  The  formal  repeal  of  the  law 
now  would  be  largely  perfunctory. 


207 


Chapter  VII. — Treasury  Relief  in  Crises  Through 

1857- 

METHODS   OF   RELIEF. 

It  has  become  a  habit  for  the  business  community  to 
rely  on  the  Treasury  for  assistance  in  times  of  financial 
stringency.  The  practice  of  the  Government  to  furnish 
reUef  began  early  in  the  history  of  the  independent  treas- 
ury and  has  been  its  uniform  poHcy,  "  when  possible,  in  all 
commercial  crises  from  1846  to  the  present  time.""  The 
methods  by  which  relief  to  the  money  market  has  been 
afiforded  have  been,  in  general,  the  same  on  all  such  occa- 
sions; but  the  extent  of  the  assistance,  the  seriousness  of 
the  crisis,  and  the  condition  of  the  revenue  and  the  pubHc 
debt  at  different  times,  make  it  desirable  to  study  the 
period  since  the  adoption  of  the  present  national  banking 
system  by  itself.  But  we  must  first  consider  the  methods 
by  which  the  Treasury  can  give  such  assistance. 

There  are  several  ways  in  which  the  power  of  the  Gov- 
ernment has  been,  or  may  be,  brought  to  bear  in  a  crisis. 
In  the  first  place,  under  some  circumstances,  a  Govern- 
ment whose  fiscal  operations  are  independent  of  banks 
may  relieve  a  protracted  stringency  by  requiring  dues  to 
it  to  be  paid  in  coin.  Under  the  influence  of  such  a  require- 
ment specie  is  likely  to  be  drawn  from  hoards,  or  from 
abroad,  and  the  Government  puts  the  metal  into  circula- 
tion by  its  disbursements.  Part  of  the  specie  so  disbursed 
is  likely  to  remain  in  circulation;  and  even  if  it  should  not, 
its  transitory  circulation  will  accomplish  some  good. 

«Cf.  Secretary  Windom:  Finance  Report,  1890. 
208 


Independent   Treasury  of  the   United   States 

Again,  the  Government  may  exercise  a  restraining  influ- 
ence on  the  banks,  retarding  discounts  and  so  checking 
speculation,  by  absorbing  for  a  time  more  money  than  it 
disburses;  it  may  cheapen  domestic  exchange  by  itself 
doing  a  transfer  business  at  low  rates  or  even  gratuitously, 
thereby  promoting  the  flow  of  money  from  places  where  it 
is  abundant  to  places  where  it  is  scarce;  it  may  supply 
money  by  anticipating  payments  of  interest  on  its  debt, 
by  adapting  other  payments  to  the  condition  of  the  market, 
and  by  the  purchase  of  bonds;  it  may  deposit  the  public 
money  in  banks,  and  allow  the  banks  to  use  the  deposits 
as  a  basis  for  making  loans;  and,  finally,  it  may  offer  to 
increase  the  supply  of  currency  by  converting  interest- 
bearing  bonds  into  noninterest-bearing  treasury  notes. 
This  last  method  has  never  been  used  in  this  country, 
although   something    analogous  to  it  was  advocated  in 

1873-" 

When  the  country  was  laboring  under  a  suspension  of 
specie  payments  by  the  banks,  under  the  administration 
of  President  Van  Buren,  there  is  no  doubt  that  the  pay- 
ment of  its  ordinary  obligations  in  specie  enabled  the 
Government  to  put  in  motion  a  small  stream  of  the  metals, 
which  "gradually  assumed  larger  dimensions,"  and  fur- 
nished a  measure  of  relief.  The  action  of  the  Government 
at  this  time  was  beneficial  in  two  ways:  It  relieved  the 
stress,  and,  by  its  method  of  doing  this,  promoted  the 
restoration  of  specie  payments. 

To  be  sure,  the  independent  treasury  was  not  established 
at  this  time,  yet  it  virtually  existed;  for  in  the  suspension 
in  1837  only  six  banks  maintained  specie  payments  and  so 

"See  Adams,  H.  C,  "Public  Debts,"  214-215. 
41969° — lo 14  209 


National     Monetary     Commission 

continued  to  be  government  depositaries.  Since  the  Sec- 
retary of  the  Treasury  was  unable  to  find  banks  in  which 
he  could  legally  deposit,  he  kept  part  of  the  public  money 
on  special  deposit  in  Washington,  while  the  rest  was  left 
in  the  hands  of  the  collecting  officers.'^ 

The  panic  of  1837  was  hastened  and  intensified,  in  this 
country,  by  the  great  inflation  of  the  currency  which  was 
produced  by  the  large  number  of  state  banks  that  sprang 
up  immediately  after  the  downfall  of  the  Second  United 
States  Bank.  The  bank  paper  in  circulation  increased 
from  $82,000,000  in  January,  1835,  to  $108,000,000  in 
January,  1836,  and  to  $120,000,000  in  the  following  De- 
cember. Within  the  same  period  the  per  capita  circula- 
tion grew  from  $7  to  nearly  $10.  The  specie  in  the  banks 
rose  only  $2,000,000  in  the  meantime,  and  that  in  circula- 
tion increased  from  $18,000,000  to  $28,000,000.  Thus  the 
currency  was  almost  entirely  bank  paper;  and  when  the 
bubble  of  speculation  built  on  it  burst,  many  of  the  notes 
became  worthless  and  most  of  them  very  much  depreciated. 
So  great  was  the  burden  of  dishonest  credit  that  resump- 
tion would  have  been  exceedingly  difficult  for  the  banks 
had  they  been  unaided.  But  the  Government  receipts 
and  payments  were  by  law  required  to  be  in  specie,  or  in 
treasury  notes  equivalent  to  specie,  and  a  steady  stream 
of  good  money  was  thus  kept  in- circulation,  part  of  which 
was  within  reach  of  the  banks  and  undoubtedly  made 
their  task  of  resumption  easier. 

The  second  mode  in  which  the  independent  treasury 
may  exert  a  beneficent  influence  in  a  crisis,  is  by  exercising 
a  restraining  influence  on  the  banks.     The  theory  of  this 

o  Finance  Report,  1837. 


Independent   Treasury  of  the   United   States 

action  is  that  by  absorbing  money  the  Treasury  makes  it 
harder  for  the  banks  to  get,  and  that  they,  in  consequence, 
do  not  discount  so  freely.  Speculation,  therefore,  it  is 
argued,  is  checked  and  the  crisis  is  retarded.  Of  course, 
any  effect  of  this  kind  can  be  produced  only  if  the  current 
receipts  of  the  Government  exceed  its  expenditures,  that 
is,  if  a  surplus  is  accumulating.  There  is  no  doubt  that 
under  proper  conditions  the  influence  exerted  by  the  sub- 
treasury  in  this  way  would  be  beneficial.  If  the  Govern- 
ment were  absorbing  money  at  a  time  when  business  was 
entering  on  a  stage  of  speculation  that  was  forcing  up 
prices,  evidently  there  would  be  two  sources  of  drain  on 
the  bank  reserves:  that  caused  by  speculative  borrowers, 
and  that  caused  by  locking  up  money  in  the  Treasury. 
The  operation  of  the  latter  would  prevent  the  former  from 
going  as  far  as  it  otherwise  would  do ;  for  it  would  diminish 
the  bank  reserves,  raise  the  rate  of  discount,  and  make 
borrowing  more  difficult.  The  result  would  be  a  diminu- 
tion of  loans  to  speculative  buyers,  which  would  cause  them 
to  lessen  their  demand  for  the  commodities  in  which  they 
were  speculating,  and  so  retard  the  inflation  of  prices. 
Some  such  influence  was  exerted  in  1854.  I'he  bank  cir- 
culation then  was  set  at  $204,689,209,  and  the  gold  and 
silver  in  the  country  at  $241 ,000,000.'^ 

The  restraining  influence  of  government  withdrawals 
of  money  is  what  Secretary  Guthrie  had  in  mind  when, 
in  his  report  for  1855-56,  he  wrote:  "The  independent 
treasury,  when  over-trading  takes  place,  gradually  fills 
its  vaults,  withdraws  the  deposits,  and,  pressing  the 
banks,  the  merchants,  and  the  dealers,  exercises  that  tem- 


o Finance  Report,  1854,  15. 


National     Monetary     Commission 

perate  and  timely  control,  which  seems  to  secm^e  the  for- 
tunes of  individuals  and  preserve  the  general  prosperity." 
While  we  may  readily  admit  that  the  action  of  the  inde- 
pendent treasury  sometimes  produces  such  results,  yet 
whether  it  actually  does  so  in  any  given  crisis  is  a  question 
of  fact  to  be  proved,  and  that  it  might  operate  in  an 
opposite  way  and  make  the  crisis  more  acute,  is  a  possi- 
bility that  must  be  recognized  and  its  conditions  defined. 

On  the  face  of  the  matter,  it  would  seem  that  the  sim- 
plest way  for  the  Government  to  give  relief  in  a  crisis,  is 
for  the  Treasury  to  deposit  its  money  in  the  banks.  This 
does  not  mean  depositing  in  ordinary  times  when  business 
is  quiet;  that  is  a  matter  which  has  been  considered  in 
another  connection.  The  deposits  here  meant  are  deposits 
of  surplus  revenue  for  the  express  purpose  of  relieving 
the  business  community  in  a  financial  storm.  But  there 
are  certain  objections  to  such  a  mode  of  affording  help 
to  business  when  it  is  distressed. 

Under  our  present  usury  law,  banks  which  receive  such 
deposits  can  not  raise  their  rate  of  discoimt  above  the 
legal  rate  in  the  State  in  which  the  bank  is  located,  except 
in  New  York  where  call  loans  above  $5,000  are  exempted. 
Therefore,  the  banks  can  not,  unless  by  evasion  of  the  law, 
apply  the  well-known  rule  to  discount  in  the  face  of  a 
panic,  freely,  indeed,  but  at  a  rate  of  discount  that  rises, 
within  certain  limits,  as  the  stress  increases.  Hence  the 
help  which  the  banks  could  give  with  the  public  money 
deposited  with  them  would  be  limited  by  the  extent  to 
which  they  can  raise  the  rate  of  discount,  supposing  the 
law  were  not  evaded.  The  demand  for  loans  at  6  or  7 
per  cent,  the  usual  legal  limits,  would  be  very  large,  and 


Independent   Treasury  of  the   United   States 

all  the  money  to  loan  would  soon  be  absorbed,  a  large 
part  of  it  by  those  whose  financial  salvation  did  not  depend 
on  getting  it;  while  others  who  were  on  the  brink  of  ruin 
might  be  unable  to  borrow,  even  though  they  could  and 
would  have  paid  a  higher  rate  of  interest  than  the  law 
allowed,  by  outbiddmg  those  who  were  not  really  in  dire 
need  of  the  money.  These  remarks  apply  to  all  loans 
throughout  the  country  excepting,  of  course,  those  made 
b}^  banks  in  New  York  on  call  in  amounts  of  $5,000  or 
more. 

Furnishing  relief  to  the  money  market  by  depositing 
the  public  money  in  banks  can  not,  then,  be  very  service- 
able, imder  existing  conditions,  outside  of  New  York, 
unless  by  evasion  of  the  law.  As  a  matter  of  fact,  this 
is  what  is  actually  done.  Hence  this  policy  of  the  Treas- 
ury condones  and  encourages  evasion  of  the  law.  True, 
the  law  is  an  unwise  one.  But  the  fact  hardly  justifies  the 
Government  in  aiding  the  evasion  of  one  of  its  own 
statutes. 

The  other  methods  mentioned  as  being  at  the  command 
of  the  Treasury  for  influencing  the  money  market  are 
rather  methods  of  direct  relief  than  methods  of  preven- 
tion, palliative  rather  than  deterrent.  They  partake, 
indeed,  of  both  characteristics;  for  aid  in  transfers,  the 
timing  of  interest  and  other  payments,  and  the  purchase 
of  bonds,  may  be  utilized  in  anticipating  commercial 
distress.  Until  comparatively  recent  years,  however, 
they  have  rather  been  measures  of  relief  when  the  storm 
was  on. 

By  the  timing  of  payments  is  meant  simply  that  a  cer- 
tain latitude  is  observed  in  paying  public  debts.     There 

213 


National     Monetary     Co  minis  s  i  on 

are  generally  some  debts  the  payment  of  which  can  legiti- 
mately be  hastened  or  deferred  for  a  short  period.  The 
plan  in  practice  has  consisted  in  throwing  the  payments 
of  one  month  into  the  month  following.  For  example, 
in  the  latter  part  of  November,  1889,  the  Secretary  of  the 
Treasury  issued  a  large  number  of  transfer  checks  so  late 
in  the  month  that  they  could  not  well  be  returned  for 
payment  until  December.'*  But  December  is  a  month  in 
which  money  is  usually  in  great  demand,  and  the  throwing 
of  the  November  disbursements  into  December  helped 
to  keep  the  market  more  equable  than  it  would  have  been 
otherwise. 

When  disbursements  have  been  hastened  by  the  Treas- 
ury for  the  purpose  of  assisting  the  money  market  they 
have  frequently  taken  the  form  of  prepayments  of  interest 
on  the  public  debt.  Such  prepayments  have  done  some 
good  at  times,  but  for  affording  relief  in  a  large  way  they 
can  not  be  relied  on.  This  plan  "must  always  be  a  lame 
method  for  relieving  the  Government  of  its  surplus,  unless 
the  inducement  offered  is  greater  than  now,  as  it  inter- 
feres with  the  free  sale  of  bonds."''  It  is  unfortunate 
that  the  Government  should  be  compelled  to  resort  to 
such  paltry  practices  because  of  defective  fiscal  machinery. 
It  ought  not  to  be  necessary.  Government  payments 
should  be  made  when  they  are  due.  Anticipation  and 
postponement  are  alike  evil;  the  one  is  a  wrong  to  the 
people,  the  other  to  the  public  creditors. 

The  practice  of  transferring  money  for  individuals  and 
firms  was  originally  adopted  by  the  Government,  not  for 

a  See  New  York  Commercial  and  P'inancial  Chronicle,  January  5,  1890:  4. 
6  Commercial  and  Financial  Chronicle,  September  17,  1887. 

214 


Independent   Treasury  of  the   United  States 

the  purpose  of  providing  a  better  distribution  of  currency, 
in  order  to  aid  the  market,  but  simply  as  a  measure  to 
force  silver  into  circulation.  In  1880  the  Government 
offered  to  pay  silver  dollars  or  certificates  free  of  charge 
at  interior  points  where  there  was  a  subtreasury  or  United 
States  depositary,  in  exchange  for  gold  paid  in  at  the  sub- 
treasury  in  New  York."  But  the  practice  was  evidently 
available  as  a  means  of  distributing  money  to  relieve  a 
local  stringency.  Advantage  would  be  taken  of  the  offer 
of  the  Government  whenever  the  demand  for  money  in 
the  places  to  which  free  transfers  could  be  made  was  at 
least  great  enough  to  cause  exchange  on  these  places  to 
be  at  a  premium  at  the  points  whence  the  money  was 
to  come. 

The  rationale  of  the  system  of  currency  transfers  is 
found  simply  in  the  use  by  the  Government  of  its  power 
to  facilitate  exchange,  in  order  to  transfer  funds  rapidly 
and  at  nominal  cost  from  places  where  they  are  idle  or 
little  needed  to  places  where  they  are  urgently  needed. 

The  system  was  developed  in  the  financial  distress  of 
the  winter  of  1890-91,  by  the  use  of  the  telegraph  to  make 
the  transfers  of  money.  In  addition  to  the  relief  afforded 
at  that  time  by  the  actual  transfer  by  telegraph  of  some 
$3,000,000  from  San  Francisco  to  New  York,  the  situation 
was  doubtless  considerably  eased  by  the  knowledge  that 
similar  action  would,  if  necessary,  be  taken  at  other  points. 

The  method  of  government  transfer  has  merit,  especially 
for  moments  of  special  acuteness  of  strain  in  the  money 
market,  in  those  cases  where  a  stringency,  instead  of  being 

o  See  Taussig,  F.  W.,  "The Silver  Situation,"  Public.  Amer.  Econ.  Assoc, 
vii:  I  (1892). 

215 


National     Monetary     Commission 

general  in  its  severity,  has  a  center,  or  a  few  centers,  of 
greatest  intensity.  This  was  doubtless  the  case  in  the 
winter  of  1890.  It  was  in  New  York  City  that  distress 
was  most  severe,  and  rehef  consequently  most  needed. 
The  effect,  of  course,  is  simply  to  relieve  the  strain  by 
making  the  distribution  of  money  more  equable.  But 
the  very  strength  of  the  practice  is  also  its  source  of  weak- 
ness. Aside  from  the  fact  that  it  trenches  on  the  legiti- 
mate business  of  the  banks,  it  is  objectionable  also  because 
the  relief  afforded  at  one  place  is  afforded  at  the  expense 
of  other  places;  and  its  limit,  of  course,  is  reached  in  the 
transfer  of  such  funds  only  as  will  not  cause  distress  at 
the  points  whence  the  money  is  drawn.  As  soon  as  the 
legal  reserves  of  the  banks  there  are  trenched  on,  or  even 
threatened,  the  movement  has  attained  the  limit  of  its 
benefit.  The  San  Francisco  banks  objected  to  the  tele- 
graphic transfers  of  1890-91  on  this  very  ground,  that 
they  depleted  their  reserves. 

Moreover,  on  general  principles,  the  system  can  not  be 
commended.  For  unless  the  amount  of  money  trans- 
ferred, free  of  charge,  to  the  community  suffering  from  a 
stringency,  were  sufficient  to  supply  all  borrowers,  there 
would  be  danger  of  intensifying  the  distress.  The  free 
transfer  of  money  in  such  a  case  would  demoralize  exchange 
on  the  place  where  the  stringency  existed,  and  make  the 
terms  harder  for  borrowers.  In  short,  the  practice  is  a 
violation  of  the  oft-quoted  principle  of  good  banking,  that 
in  a  crisis  money  enough  for  all  necessary  purposes  should 
be  offered  for  loan,  but  on  terms  so  hard  that  only  those 
in  real  need  will  seek  to  borrow.  Finally,  if  the  financial 
strain  were  due  to  the  locking  up  in  the  subtreasury  of 

216 


Independent   Treasury  of  the    United   States 

money  needed  to  restore  the  currency  to  its  normal  vol- 
ume,*^ complete  relief  by  the  method  of  currency  transfer 
would  be  impossible,  because  the  transfers  do  not  add  to 
the  volume  of  money  afloat;  and  the  furnishing  of  only 
partial  relief,  of  help  that  stops  short  of  the  complete  res- 
toration of  confidence,  may  react  in  a  distress  more  acute 
than  before. 

The  deposit  of  public  money  in  the  banks  for  the  pur- 
pose of  relieving  a  stringency  is  a  method  of  assistance 
which  could  not  lawfully  be  employed  in  the  period  we 
are  now  considering.  It  came  into  use  after  the  resump- 
tion of  specie  payments,  and  was  resorted  to  in  some 
degree  in  the  twenty  following  years,  but  always  under 
considerable  criticism.  From  about  1901  the  practice  be- 
came more  usual  and  reached  its  fullest  development  in 
the  panic  of  1907.  Its  advantages  and  disadvantages 
will  be  discussed,  therefore,  in  connection  with  the  study 
of  the  later  period. 

The  other  mode  of  affording  relief  to  a  straitened 
market  is  by  the  purchase  of  bonds  with  money  which  has 
accumulated  in  the  Treasury.  Evident^  if  there  is  no 
surplus  no  relief  can  be  furnished  in  this  way.  It  is  on 
the  existence  of  the  policy  of  surplus  financiering,  as  much 
as  on  the  existence  of  the  independent  treasury,  that  the 
efficacy  of  this  mode  of  relief  must  depend.  If  that  policy 
were  abandoned,  aid  could  be  rendered  in  this  way  only 
from  temporary  surpluses  that  happened  to  accumulate 
in  hard  times,  and  the  scope  of  the  influence  of  this  means 
of  assistance   would  be  materially  diminished.     On  the 

«  That  is,  the  amount  needed  for  the  current  voUime  of  commercial 
transactions. 

217 


National     Monetary     Commission 

other  hand,  the  policy  of  surplus  financiering,  if  there  were 
no  independent  treasury,  would  not  by  itself  be  a  sufficient 
condition  for  relief  from  the  Government;  for  the  exist- 
ence of  a  surplus,  if  it  were  already  deposited  in  the  banks, 
would  not  make  it  possible  for  the  Treasury  to  help  the 
money  market.  It  is  the  existence  of  a  surplus  in  the 
vaults  of  the  independent  treasury  that  confers  on  the 
Government  the  power  of  easing  a  panicky  market. 

OPERATIONS    IN    1853    AND    1857. 

As  already  remarked,  the  policy  of  giving  relief  in  a 
stringency  by  the  purchase  of  bonds  is  not  new.  In  1853 
there  was  considerable  fear  that  the  accumulation  of 
money  in  the  Treasury  would  distress  the  market,  and  the 
Secretary  was  urged  to  expend  the  surplus  which  had 
accumulated.  There  was  no  panic,  or  even  crisis,  but 
only  a  stringency  or  pressure  for  money.  Credit  was  not 
disturbed.  The  stringency  was  intensified  by  a  contrac- 
tion of  the  currency  due  to  the  disappearance  of  silver 
from  circulation.  To  coimteract  the  effect  of  this  con- 
traction the  Secretary  deposited  gold  in  the  mint  with 
which  to  purchase  silver.  His  own  account  of  the  trans- 
action is  as  follows:  "  The  daily  payments  at  the  Treasury, 
in  discharge  of  the  public  liabilities  and  the  redemption 
of  said  loan,«  did  not  equal  the  receipts.  A  large  surplus 
accumulated  in  the  Treasury,  and  became  a  cause  of  alarm 
in  commercial  and  financial  circles.  It  was  hoped  that 
the  accumulation  in  the  Treasury  would  exercise  a  bene- 
ficial restraint  upon  importations  and  speculative  credit 

a  Of  1843. 


!l8 


Independent   Treasury  of  the    United   States 

enterprises,  and  bring  the  business  of  the  country  into  a  . 
safe  and  wholesome  condition;  yet,  under  the  apprehen- 
sion that  a  panic  might  arise  from  a  too  stringent  opera- 
tion of  the  Treasury,  it  was  determined  to  make  advances 
to  the  mint  for  the  purchase  of  silver  for  the  new  coinage, 
and  to  enable  the  mint  to  pay  promptly  and  in  advance  of 
coinage  for  gold  bullion. "«  Some  $5,000,000  were  depos- 
ited in  the  mint  to  enable  "the  mint  to  give  gold,  which 
circulated  as  money,  for  silver  that  was  out  of  circulation, 
because  of  the  premium  upon  it,  and  for  gold  bullion  that 
could  not  circulate  as  money  until  coined."^ 

The  relief  afforded  by  this  means  was  not  sufficient  to 
make  the  money  market  easy,  and  the  purchase  of  bonds 
was  resorted  to.  An  arrangement  was  made  with 
brokers  in  New  York  and  Philadelphia  to  purchase  bonds 
at  the  market  price,  to  be  paid  for  on  presentation  at  the 
Treasury.  Even  this  means  failed  to  allay  apprehension, 
because  the  surplus  still  accumulated,  and  the  Secretary 
increased  his  offers.  In  a  circular  of  July  30,  1853,  he 
undertook  to  redeem  before  December  i,  $5,000,000  of 
the  loans  of  1847  and  1848,  at  a  premium  of  21  per  cent 
and  interest  from  the  ist  of  July.  On  the  22d  of  August 
he  enlarged  his  bid  by  offering  to  purchase  $2,000,000  of 
the  loans  due  in  1856  and  1862  at  a  premium  of  8>^  per 
cent  and  of  16  per  cent,  respectively.  "The  result," 
wrote  the  Secretary,  "has  been  satisfactory."  The 
purchase  of  bonds  was  continued  through  the  year. 

o  Finance  Report,  1853.  b  Ibid. 

/ 


219 


National     M  o  n  e  t  ar  y     Commission 

The  following  figures  show  the  specie  in  the  banks  and 
subtreasury  at  New  York  in  the  fall  of  1853  to  the  nearest 
thousand : « 


August  6  .  .  .  . 
September  3  . 
October  1  .  .  .  . 
N'ovember  1 2 
December  10  . 
December  31  . 


Bank 
loans. 

Circu- 
lation. 

Deposits. 

Bank 
specie. 

S97.900 

S9,Sio 

S6o,99s 

$9. 746 

91.  741 

9.SS4 

57. S03 

II, 268 

90, 150 

9.S22 

57.969 

II,  232 

82,882 

9,  288 

56,  201 

12.824 

86, 709 

9.076 

57.838 

12,494    1 

90.  162 

8.927 

58.964 

11.058    1 

Specie 
iu  sub- 
treasury. 

?8, 406 
9,079 
9,726 
6,  147 


The  coin  in  all  the  subtreasuries  and  depositaries  at 
the  end  of  the  year  was  $23,951,945.  While,  in  spite  of 
the  efforts  of  the  Secretary,  the  specie  in  the  New  York 
Subtreasury  increased  through  August  and  September, 
it  did  so  less  rapidly  than  before,  and  the  banks  were 
benefited. 

It  would  seem  from  the  figures  that  the  disbursements 
of  the  subtreasury  helped  to  increase  the  specie  holdings 
of  the  banks  in  November  and  December,  and  enabled 
them  to  get  into  a  somewhat  stronger  position  toward 
the  end  of  the  year;  but,  coming  when  they  did,  they  had 
little  or  no  effect  in  curtailing  market  operations.  They 
seem  rather  to  have  given  speculation  a  somewhat  freer 
play. 

One  effect  of  the  purchase  of  bonds  by  the  Government 
is  thus  recorded  by  the  Bankers'  Magazine:''  "Owing 
partly  to  the  notice  of  the  Treasury  Department  the 
government  6  per  cent  loans  of  1867-68  have  advanced 
from  120X  to  122,  and  the  5  percents  from  108 >^  to  109." 

The  next  important  instance  of  government  relief  to 
the  market  was  in  1857.     "The  crisis  of  1857  w^as  an  unu- 

<^  The  figures  are  from  the  Bankers'  Magazine.        &  September,  1853. 

220 


Independent   Treasury  of  the    United   States 

sually  simple  case  of  activity,  speculation,  overbanking, 
panic,  and  depression. "« 

The  symptoms  of  the  coming  distress  were  seen  early 
in  the  year,  and  to  avert  disaster,  if  possible.  Secretary 
Cobb  began  the  purchase  of  bonds,  his  purpose  being,  in 
his  own  words,  to  afford  "relief  to  the  commercial  and 
other  interests  of  the  country,  which  were  then  struggling 
to  ward  off  the  revulsion  which  finally  came  upon  them." 

In  the  summer  months  of  1857,  the  New  York  banks 
increased  their  loans  at  a  rapid  rate,  the  average  for  June, 
July,  and  August  being  over  $8,000,000  larger  than  the 
average  for  the  same  months  in  1856.  The  banks  fol- 
lowed this  great  expansion  with  a  rapid  contraction  of 
loans,  the  decrease  from  August  i  to  December  5  amount- 
ing to  over  $34,000,000.  In  the  meantime  their  specie 
more  than  doubled,  and  their  notes  in  circulation  de- 
creased over  $2,000,000. 

The  following  table  shows  the  state  of  affairs  for  1857, 
to  the  nearest  thousand :  ^ 


January  3  .  . 
February  7  .  . 

March  7 . 

April  II 

May  2 

June  6 

July  3 

August  I  .  .  . 
September  5 
October  3  .  .  . 
November  7  . 
December  5 . 


Specie  in 

New  York 

subtreasury. 


ill,  430 
13.618 
IS. 189 
IS, I7S 
14,  408 
12.  431 
10,317 

12,   162 

11,678 

7,748 

S.408 

3.986 


Specie  in 

New  York 

banks. 

$11 

172  i 

1 1 

144  ; 

1 1 

707 

10 

884 

I  2 

100 

13 

I3S 

1 2 

837 

1 2 

918 

10 

228 

1 1 

400 

16 

492 

26 

070 

Loans  of 

New  York 

banks. 


$109, 149 
112,877 
in,  900 
US. 374 
114,  409 
IIS. 338 
115,044 
120, S97 
112, 221 
105,93s 
95.866 
96, 526 


Circulation 
of  New  York 

banks. 


?8,6o2 

8,  426 
8.46s 
8.787 

9,  006 
8.838 
8,  901 
8,662 
8.673 
7.916 
6.434 
6.S5S 


"Taussig:   "History  of  the  United  States  Tariff,"  p.  118. 
*The  figures  are  from  the  Bankers'  Magazine,  April,  1857. 


221 


National    Monetary     Commission 

Between  the  i  st  of  August  and  the  first  week  in  Decem- 
ber the  banks  gained  a  Httle  more  than  $13,000,000  of 
specie,  while  the  subtreasury  lost  about  $8,000,000,  half 
of  which  was  paid  out  in  the  purchase  of  bonds.  The  net 
imports  of  gold  at  New  York  for  the  same  time  were 
$1,745,000,  which,  with  $8,812,000  from  California,  made 
a  net  total  of  $10,557,000.  It  thus  appears  that  a  large 
part  of  the  increased  strength  of  the  banks  came  from  the 
proceeds  of  the  purchases  of  bonds  by  the  Government. 
The  Secretary  of  the  Treasury  continued  buying  bonds  as 
long  as  he  could,  and  took  the  ground  that  it  might  be 
wise  to  spend  the  whole  of  the  surplus  in  that  way,  so  as  to 
relieve  the  market,  even  if  as  a  result  expenses  would  have 
to  be  met  later  by  new  loans. 

The  influence  of  the  independent  treasury  in  this  crisis 
was  not  all  in  one  direction.  During  the  years  1855,  1856, 
and  1857,  the  customs  receipts  were  unusually  large,  and 
the  accumulation  in  government  vaults  tended  to  increase. 
In  March,  1857,  the  Government  held  in  the  various 
branches  of  the  subtreasury  over  $2 1 ,000,000.''  "  At  New 
York  the  public  funds  are  accumulating  at  a  fearful  rate, 
by  means  of  custom-house  duties,  the  latter  being  for  the 
current  fiscal  year,  thus  far,  at  the  rate  of  $9,000,000 
beyond  the  extravagant  years  1855-56."  There  is  no 
doubt  that  the  strain  in  the  money  market  was  increased 
by  the  accumulations  of  the  Government  at  this  time. 
In  so  far  as  these  accumulations  restrained  the  discounts 
which  the  banks  made  for  purposes  of  speculation,  their 
influence  must  have  been  to  prevent  the  tide  of  specula- 


o  See  Bankers'  Magazine,  March,  1857. 


Independent   Treasury  of  the   United  States 

tion  from  rising  as  high  as  it  otherwise  would  have  done,  or 
to  bring  on  the  inevitable  crash  sooner  than  it  would  have 
come  of  itself.  Whatever  influence  of  this  nature  the 
absorptions  of  the  subtreasury  may  have  had  at  this  time, 
was  partly  counteracted,  however,  by  the  early  purchase 
of  bonds.  The  Secretary  began  to  offer  help  too  far  in 
advance  of  a  real  crisis,  and  thus  held  out  hope  to  specu- 
lators that  they  could  rely  on  further  aid.  The  accumula- 
tion of  funds  in  the  subtreasury  at  a  "  fearful "  rate  was  a 
good  thing  so  long  as  the  business  which  caused  it  was 
based  on  overspeculation,  because  the  accumulation  was 
constantly  reducing  the  basis  of  that  speculation.  The 
accumulation  should  have  been  permitted  to  go  on  until 
the  speculation  lessened  and  the  crisis  was  at  hand.  Dis- 
counting too  far  in  advance  of  a  panic  will  not  prevent  it, 
but  rather  make  it  more  certain  by  furnishing  fuel,  so  to 
speak,  on  which  speculation  can  feed  further.  Too  early 
disbursements  from  the  Treasury  may  intensify  rather 
than  mitigate  financial  distress.  At  least,  disbursements, 
if  made  too  early,  will  fail  to  do  as  much  good  as  they 
would  if  made  later.  This  was  the  case  with  Secretary 
Cobb's  early  disbursements  in  1857. 

Although  the  purchases  of  bonds  did  not  furnish  as 
much  relief  as  they  would  have  done  if  they  had  been  held 
back  until  later,  yet  they  certainly  accomplished  much 
good.  The  specie  paid  out  strengthened  the  banks,  as 
the  figures  show,  and  made  the  task  of  resumption  easier 
and  sooner  possible;  and  if  the  banks  had  not  weakened 
themselves  so  much,  it  is  possible  that  the  Government 
disbursements,  especially  if  they  had  been  delayed  a  little 
longer,  would  have  saved  them  from  suspension. 

223 


National    Monetary     Commission 

One  wholly  good  result  of  the  existence  of  the  inde- 
pendent treasury  at  this  time  was  the  maintenance  of 
specie  payments  by  the  Government.  Had  the  public 
money  been  deposited  in  the  banks,  or  had  the  receipt 
of  bank  notes  for  public  dues  been  lawful,  the  Treasury 
would  have  been  as  seriously  embarrassed  as  at  the  begin- 
ning of  the  panic  of  1837.  Comparing  the  situation  in  1857 
with  that  in  1837,  the  Secretary  of  the  Treasury  wrote : " 
"The  most  remarkable  feature  distinguishing  the  two 
periods  has  reference  to  the  effect  upon  the  commercial 
and  general  business  interest  of  the  country  produced  by 
the  present  operations  of  the  independent  treasury.  It  is 
the  relief  which  has  been  afforded  to  the  money  market  by 
the  disbursements  in  specie  of  the  General  Government. 
In  1837  the  demand  of  the  Government  for  its  funds  with 
which  to  meet  its  obligations  weakened  the  banks  or  crip- 
pled their  resources  and  added  to  the  general  panic  and 
pressure.  In  1857  the  disbursements  by  the  Government 
of  its  funds  which  it  kept  in  its  own  vaults,  supplied  the 
banks  with  specie,  strengthened  their  hands,  and  would 
thus  have  enabled  them,  to  afford  relief  when  it  was  so 
much  needed  if  they  had  been  in  a  condition  to  do  it." 

It  is  worth  noticing  incidentally  that  the  appearance  of 
the  Government  on  the  market  to  buy  bonds  forced  their 
prices  up  once  more.  Said  the  Bankers'  Magazine  of 
April,  1857 :  "In  government  bonds  the  rates  are  nominal, 
few  being  offered  in  the  market,  as  the  Secretary  of  the 
Treasury  is  preparing  to  pay  a  premium  of  1 6  per  cent  on 
the  bonds  due  in  1867-68,  with  the  accrued  interest  of 
three  months,  equivalent  in  all  to  117K  P^r  cent."    . 

1  Finance  Report,  1857. 
224 


Chapter  VIII. — Treasury  Relief. in  Crises,  1873  to 

1890. 

THE    PANIC   OF    1873. 

In  the  panic  of  1873  we  have  to  deal  with  conditions 
different  from  those  which  prevailed  in  1837  or  in  1857. 
The  bank  paper  was  as  truly  inconvertible  in  1873, 
indeed,  as  it  was  in  the  other  years  mentioned,  although 
it  could  be  exchanged  for  government  notes  or  green- 
backs. For  the  Government  itself  was  on  a  depreciated 
paper  basis.  Therefore,  it  could  not  promote  resumption 
by  its  disbursements  of  specie  and  treasury  notes,  as  it 
did  in  1837  and  1857.  At  the  height  of  the  panic  there 
lay  in  the  vaults  of  the  Treasury  "$50,000,000  of  gold 
coin,  which  could  lawfully  have  been  paid  out  in  exchange 
for  government  obligations  without  embarrassing  the 
operations  of  the  Government;  but  as  specie  could  not 
be  employed  to  pay  private  debts  without  a  sacrifice  at 
once  of  about  1 2  per  cent — the  amount  of  its  premium  in 
paper — it  was  not  wanted."  "  The  Government  was  able, 
however,  to  lend  from  its  stored-up  surplus  of  the  legal- 
tender  currency.  Under  the  national  banking  law  the 
receipts  from  internal  revenue,  as  they  were  collected, 
could  be  deposited  in  the  national  banks.  But  this  mode 
of  assistance  was  at  the  time  of  comparatively  small 
importance.  There  were  legal  tenders  in  the  Treasury, 
but  they  could  not  be  transferred  to  the  banks,  although 
an  effort  was  made  to  induce  the  Secretary  to  do  so.'' 

0  Upton:  "Money  in  Politics,"  139.  b  See  chapter  xi. 

41969°— 10 15  225 


National    Monetary     Commission 

The  proceeds  of  purchases  of  bonds,  however,  could  be 
deposited  in  the  banks,  along  with  internal-revenue 
receipts,  and  in  the  early  period  of  the  stringency  the 
legal-tender  reserves  were  increased  somewhat  by  this 
process. 

Like  the  panic  of  1857  that  of  1873  ^^^  world-wide. 
In  this  country  it  was  largely  the  result  of  the  too  rapid 
transmutation  of  circulating  capital  into  fixed  capital 
during  the  few  years  preceding,  under  the  impetus  of  a 
fever  of  industrial  speculation.  These  years  were  also 
years  of  extensive  railroad  building.  Over  4,000  miles 
were  built  in  1873  alone.  During  the  last  two  months  of 
1872  the  money  market  was  much  depressed,  the  lowest 
discount  rate  being  7  per  cent.  In  the  middle  of  the 
following  January  the  rate  sank  a  little,  but  soon  rose 
and  continued  very  high  until  May.  The  immediate 
cause  of  the  crash  in  the  money  market  was  due  to  the 
fact  that  some  of  the  largest  of  these  enterprises  did  not 
realize  profits  quickly  enough  to  pay  the  loans  which  had 
been  advanced  on  them.  Credit  was  shaken  in  conse- 
quence, and  panic  resulted.  The  panic  was  not  due, 
properly  speaking,  to  a  lack  of  money,  but  to  a  lack,  or 
destruction,  of  credit. 

The  forerunner  of  the  coming  disaster  was  a  severe 
money  stringency  in  the  fall  of  1872,  to  the  occurrence  of 
which  the  unwise  management  of  the  Treasury  doubtless 
contributed.  The  monthly  currency  balance  of  the  Treas- 
ury averaged  fourteen  and  one-half  millions  in  1871,  and 
twelve  and  a  half  in  1872.  The  Secretary  lessened  the 
money  afloat  by  selling  gold  to  a  greater  extent  than  he 


226 


Independent  Treasury  of  the    United  States 

bought  bonds.  As  the  gold  could  not  circulate,  the  net 
result  was  a  loss  of  currency  to  business.  This  course  of 
action  was  the  reverse  of  that  followed  by  Secretary  Cobb 
in  i^si-°'  He  bought  silver,  which,  did  not  circulate, 
with  gold,  which  did  circulate;  Secretary  Boutwell,  on  the 
other  hand,  sold  noncurrent  gold  for  current  greenbacks. 
So  far  as  this  process  did  not  occur  in  the  spring  and  fall, 
the  seasons  at  which  the  interior  demand  for  money  is 
most  active,  it  was  not  very  objectionable  under  the  cir- 
cumstances which  prevailed  at  the  time.  For  the  years 
1871,  1872,  and  1873  were  years  of  too  great  speculation, 
and  it  is  very  probable  that  the  absorptions  of  the  Treas- 
ury restricted  the  ability  of  the  banks  to  loan,  and  so 
retarded  speculation.^  But  the  management  of  the 
Treasury  was  not  dictated  by  conscious  adherence  to  a 
policy  of  restriction  of  speculation.  Consequently,  what 
little  influence  for  good  the  independent  treasury  may 
have  had  in  this  way,  in  the  three  years  under  considera- 
tion, must  be  regarded  as,  on  the  whole,  accidental. 

The  current  of  speculation  was  too  strong,  however,  to 
be  stopped  by  any  restrictive  influence  of  the  subtreasury. 
The  stringency  became  severe  in  the  fall  of  1872,  and  the 
Secretary  was  again  called  on  to  relieve  the  pressure.  In 
the  first  week  of  October  he  sold  $5,000,000  of  gold,  and 
deposited  the  proceeds  in  designated  banks.  Then,  with- 
out previous  notice,  he  bought  $5,000,000  worth  of  five- 
twenty  bonds,  so  that  $10,000,000  of  currency  were,  by  the 
two  transactions,  made  available  for  business.  The  bank 
reserves  immediately  rose,  and  the  banks  enlarged  their 

«  See  p.  219. 

^  Cf.  the  New  York  Independent,  January  9,  1873.     Monetary  article. 

» 
227 


National     Monetary     C  ommi  s  s  io 


n 


discounts.     Following  are  the  figures  "-  for  the  New  York 
banks : 


October  5 
October  1 2 
October  19 
October  26 


Loans  and 
discounts. 


$269, 810, 300 
268, 298, 300 
270.  557.  600 
274, 925, 000 


Specie  in 
banks. 


$9,943,900 
12,  217,  800 
12,  625,  500 
10, 795. 300 


Legal  tenders. 


541,915,  700 
45. 759. 400 
52,  586,  400 
52,342,  100 


Under  the  influence  of  these  changes  in  the  condition  of 
the  banks,  call  loans,  which  on  the  4th  of  October  had 
ranged  from  6  per  cent  in  currency  to  7  per  cent  in  gold, 
with  commissions  additional  in  some  cases,  fell  to  a  range 
of  from  3  or  4  to  7  per  cent  in  currency,  and  the  market 
for  such  loans  became  easy,  with  an  average  rate  of  from  5 
to  6  per  cent. 

There  was  a  great  difference,  however,  between  the 
extent  of  the  relief  that  came  to  stockbrokers  and  that 
experienced  by  commercial  borrowers.  The  easy  rates 
accommodated  the  brokers,  but  the  best  indorsed  sixty- 
day  commercial  paper  could  hardly  be  discounted  for  less 
than  10  per  cent.  "  It  thus  appears,"  said  the  Chronicle,* 
"that  the  Treasury  operations  have  thus  far  chiefly  bene- 
fited the  borrowers  of  Wall  and  Broad  streets  more  than 
the  commercial  community."  This  fact  would  seem 
to  show  that  credit  was  already  shaken,  and  that  those 
who  had  money  feared  to  put  it  where  they  could  not 
instantly  call  it  back  at  need.  As  shown  at  this  time, 
there  is  ground  for  thinking  that  when  a  stringency  or  a 

oThe  New  York  Commercial  and  Financial  Chronicle,  October  19,  1872: 

519- 

b  Ibid.,  p.  517. 


228 


Independent    Treasury   of  the   United  States 

panic  is  brought  on  primarily  by  a  weakening  of  credit^ 
and  not  primarily  by  a  lack  of  money — that  is,  when  the 
stringency  is  the  result,  and  not  the  cause,  of  unsteadiness 
of  credit — the  disbursements  of  the  Government  for  pur- 
poses of  relief  afford  more  help  to  those  engaged  in  specu- 
lation than  to  those  in  commercial  enterprises  properly  so 
called.  This  fact  limits  very  materially  the  justification  of 
government  disbursements  for  relieving  the  market  under 
such  circumstances. 

Although,  as  we  have  seen,  the  Secretary  of  the  Treas- 
ury had  shaped  his  policy  in  aid  of  the  money  market  early 
in  October,  he  did  not  continue  to  do  so  for  long.  The 
bulk  of  the  money  deposited  in  some  of  the  banks  in  Octo- 
ber was  withdrawn  later  on.  During  December,  a  month 
when  money  is  in  demand,  the  banks  lost  to  the  sub- 
treasury  about  $3,500,000,  despite  the  remonstrances  of 
the  mercantile  community."  The  result  was  that  loans 
on  government  securities  ran  up  to  7  per  cent  in  gold, 
while  borrowers  on  other  stock  collateral  were  obliged  to 
pay  from  one-sixteenth  to  one-quarter  per  cent  per  day 
for  their  loans.  ^ 

It  is  clear  that  in  1872  the  action  of  the  independent 
treasury,  as  managed  by  Secretary  Boutwell,  favored  spec- 
ulation rather  than  legitimate  business,  by  the  ill-timed 
contractions  and  expansions  which  the  Secretary  caused, 
so  that  its  influence  must,  on  the  whole,  be  set  down  as 
evil.  The  same  thing  is  true  of  the  year  1873  for  the 
same  injudicious  course  was  followed.     No  definite,  con- 

«  See  the  Bankers'  Magazine,  January,  1873,  and  the  New  York  Inde- 
pendent, January  2,  1873. 
&  Ibid. 


229 


National    Monetary     Commission 

sistent,  and  continuous  policy  was  adopted  for  guiding  the 
relations  of  the  Treasury  to  the  business  community. 

The  stringency  of  1872  became  the  panic  of  1873.  The 
money  market  was  in  an  unsettled  condition  most  of  the 
time  through  the  first  nine  months  of  the  year.  The  legal- 
tender  averages  of  the  banks  were  lower  than  in  1872. 
There  was  a  stringency  in  April,  discount  rates  ran  up, 
and  a  slight  panicky  feeling  prevailed,  especially  on  the 
occurrence  of  the  panics  in  Vienna  and  Berlin.  Between 
May  and  August  the  banks,  responding  to  the  speculative 
demand  for  money,  heedlessly  expanded  their  loans  some 
$20,000,000.  On  the  17th  of  September  the  New  York 
Warehouse  and  Security  Company  failed,  and  the 
business  community  was  thrown  into  a  state  of  anxiety. 
Secretary  Richardson  took  no  steps  to  ease  the  situation. 
On  the  1 8th  the  crash  of  credit  came  with  the  suspension  of 
Jay  Cooke  &  Co.  Still  the  Government  took  no  action, 
though  failure  followed  failure,  until  the  19th.  Then  it 
was  determined  to  buy  $10,000,000  of  five- twenty  bonds 
at  par  in  gold  on  Saturday,  the  20th,  over  the  counter  of 
the  New  York  subtreasury.  Owing  to  defective  clerical  fa- 
ciHties  only  a  little  more  than  $2,500,000  were  purchased. 
Orders  were  then  issued  by  Secretary  Richardson  to  pur- 
chase five-twenty  bonds  as  fast  as  offered  in  private  sale, 
at  the  New  York  subtreasury,  at  a  price  not  higher  than 
par  in  gold.  On  Monday,  the  22d,  over  $3,000,000  were 
accordingly  paid  out  in  legal  tenders  for  bonds,  and 
over  $5,500,000  for  legal-tender  certificates.  Next  day 
$3,000,000  more  were  put  out  for  bonds  and  over  a  million 
for  certificates.  On  Thursday,  the  25th  of  September,  the 
Treasury  stopped  buying,  having  paid  out  over  $24,000,000 

230 


Independent   Treasury  of  the   United   States 


of  currency  for  bonds  and  certificates.  During  the  week 
the  Secretary  had  bought  $12,000,000  of  bonds  from  the 
savings  banks,  and  on  the  29th  he  prepaid  the  November 
interest. 

These  measures  were  practically  all  the  help  which  the 
Treasury  rendered  at  this  time,  and,  while  they  were 
doubtless  of  some  avail,  they  were  utterly  futile  as  a  stay 
to  the  panic.  None  of  the  money  disbursed  went  into 
the  banks.  During  the  week  when  the  Treasury  was 
buying  bonds  they  lost  eleven  millions  of  greenbacks; 
their  reserve  ran  down  from  $38,000,000  on  the  6th  of 
September  to  $12,000,000  on  the  27th,  and  their  deposits 
decreased  some  $50,000,000.'^     The  figures  are: 


Date. 

Loans. 

Specie. 

Legal  tenders. 

Deposits. 

August  30 

September  6 

September  13 

September  20 

$288,  883,000 
288,  374,  200 
284,  536,  200 
278,  421, 700 

$23,  095,  200 
20,  767,  000 
20,  442,  300 
18,  844,  600 

$44,  729,  300 
38,679,900 
36,  717,  200 
34,  307,  900 

$220,390,300 
212,  772,  700 
207,317,500 
198,  040,  100 

The  figures  of  the  condition  of  the  banks  for  the  ten 
weeks  after  September  20  are  not  available  because  re- 
ports were  not  published  during  that  time. 

The  success  met  by  the  Government  in  its  efforts  to 
allay  the  panic  is  thus  shown  to  have  been  very  small. 
The  Secretary  of  the  Treasury  himself  evidently  felt  this, 
if  we  may  judge  from  the  modest  account  of  his  efforts 
given  in  his  report.  He  tells  us  there  that  bonds  were 
purchased  for  the  sinking  fund  to  the  amount  of  about 
$13,000,000,  "when  it  became  evident  that  the  amount 
offering  for  purchase  was  increasing  to  an  extent  beyond 

o  Report  of  Comptroller  of  the  Currency,  1876;   177  and  251. 
231 


National     Monetary     Commission 

the  power  of  the  Treasury  to  accept,  and  the  purchasing 
was  closed.  *  *  *  The  currency  paid  out  of  the 
Treasury  for  bonds  did  much  to  strengthen  many  savings 
banks  and  to  prevent  a  panic  among  their  numerous  de- 
positors, who  began  to  be  alarmed;  and  had  there  devel- 
oped an  extended  run  upon  those  useful  institutions,  it 
would  inevitably  have  caused  widespread  disaster  and 
distress.  It  also  fortified  other  banks,  and  checked  the 
general  alarm  to  some  extent." 

The  futility  of  the  efforts  of  the  Government  to  relieve 
the  distress  was  shown  in  the  rates  of  discount  also.  The 
rate  on  call  loans  went  up  from  7  per  cent  in  gold,  on  the 
1 8th  of  the  month,  to  i^  per  cent  a  day  on  the  20th,  the 
day  of  the  first  government  purchase  of  bonds;  and  two 
or  three  days  later  there  was  no  quotable  rate.  These 
facts  show  that  the  provisions  of  the  Treasury  to  mitigate 
the  pressure  did  not  inspire  confidence,  and  so  could  not 
check  the  panic.  For  they  prove  that  the  money  dis- 
bursed by  the  Government  was  hoarded.  Part  of  it  went 
into  the  savings  banks.  "The  savings  institutions  of 
New  York  and  Brooklyn  hold  about  thirteen  millions 
of  greenbacks,"  said  the  Financial  Chronicle. <^  "Part  of 
these  notes  have  been  drawn  from  our  city  banks,  but  a 
large  amount  were  obtained  from  the  Treasury  last  week 
in  payment  for  United  States  bonds.  These  greenbacks 
are  now  lying  idle  in  the  vaults  of  the  savings  banks;  and 
the  question  is.  What  f)ught  to  be  done  with  them." 

It  is  not  to  be  denied  that  the  aid  rendered  the  savings 
banks   was  good   and   commendable.     But  this   did  not 

"  October  4,  1873,  447. 
232 


Independent   Treasury  of  the   United   States 

help  the  general  situation.  There  was  a  time  during  the 
panic  when,  perhaps,  it  was  advisable  for  the  savings 
banks  to  increase  their  stock  of  greenbacks;  but  it  was 
not  absolutely  necessary,  because  they  could  have  pro- 
tected themselves  from  a  sudden  run  by  taking  advantage 
of  the  clause  in  their  charters  permitting  them  to  require 
thirty  days'  notice  of  withdrawals.  Moreover,  the  savings 
banks  kept  their  greenbacks  in  their  vaults  after  the  dan- 
ger to  themselves  had  passed,  and  so  prevented  the  use  of 
of  them  by  the  mercantile  community.  By  this  action 
the  efforts  of  the  Government  were  so  far  nullified. 

As  to  the  reasons  for  the  complete  failure  of  the  Sec- 
retary of  the  Treasury  to  accomplish  his  purpose  of  check- 
ing the  panic,  we  must  note,  in  the  first  place,  that  his 
steps  were  not  taken  early  enough.  The  Government 
did  not  move  in  the  matter  until  the  crash  of  credit  oc- 
curred and  the  market  had  passed  from  the  stage  of  crisis 
to  that  of  panic.  The  proper  time  for  the  purchase  of 
bonds  was  before  that  point;  the  latest  time  at  which  it 
should  have  begun  would  have  been  in  time  to  save  Jay 
Cooke  &  Co.,  if  that  had  been  possible.  That  is,  it  seems 
that  if  the  Secretary  had  sold  his  bonds  on  Wednesday 
instead  of  Saturday,  much  greater  good  might  have  been 
done;  for  if  there  was  any  time  at  which  confidence  could 
have  been  restored  by  easier  money,  it  was  then.  After 
the  failure  of  Cooke  &  Co.,  the  current  of  suspicion  and 
distrust  was  altogether  too  strong  to  be  stopped  by  the 
limited  aid  which  the  Government  could  give.  Even  after 
the  government  disbursements  of  the  20th  were  supple- 
mented, on  the  22d,  by  the  use  of  $10,000,000  of  clearing- 


233 


National    Monetary     Commission 

house  certificates,  the  feeUng  of  panic  did  not  disappear, 
and  it  was  thought  necessary,  two  days  later,  to  permit 
the  use  of  $10,000,000  more  certificates. 

The  measures  of  the  Secretary  of  the  Treasury  were 
also  insufficient  for  the  situation  at  the  time  they  were 
taken.  Indeed,  this  was  felt  when  the  Secretary  first 
anxiounced  his  intention  of  buying  bonds.  There  was 
general  disappointment  at  the  narrow  scope  of  his  meas- 
ures. It  was  felt  that  more  liberal  disbursements  should 
have  been  provided  and  that  the  Government  should  have 
stood  ready  to  redeem  not  only  the  five-twenty  bonds, 
but  any  issue  of  its  stock.  It  was  announced  later,  to  be 
sure,  that  the  Treasury  would  buy  bonds  indefinitely; 
but  that  could  be  only  nominally  true,  because,  as  the 
event  showed,  the  amount  of  money  at  the  disposal  of  the 
Secretary  was  very  limited. 

It  may  be  questioned,  indeed,  whether  the  action  of 
the  Government  at  this  time  did  not  do  more  harm  than 
good.  The  money  which  it  spent  went,  as  has  been  shown, 
into  private  hoards  and  into  the  savings  banks,  and  so 
furnished  no  relief  to  the  market  in  general.  It  was  just 
as  much  out  of  the  reach  of  the  business  community  as  it 
had  been  when  it  lay  in  the  vaults  of  the  Treasury.  But 
the  public  relied  on  the  Government;  they  expected  that 
its  action  would  be  a  great  help,  and  the  general  tone  of 
affairs  immediately  after  the  failure  of  the  measures  of 
the  Government  seems  to  show  that  the  reaction  of  dis- 
appointment hiduced  more  distrust  and  added  to  the 
panic.  Both  in  1857  and  1873,  then,  the  ability  of  the 
Government  to  allay  the  panic  was  counteracted  by  the 
fact  that  the  public  knew  just  about  how  far  the  Secretary 

234 


Independent   Treasury  of  the    United   States 

could  go.  He  could  offer  only  a  limited  relief,  which  had 
little  moral  efifect. 

The  insufficiency  of  the  Treasury  provisions  became 
evident  on  Saturday,  the  20th,  and  the  use  of  clearing- 
house certificates  became  necessary  on  the  next  Monday. 
It  is  questionable  whether  a  resort  to  these  would  have 
been  necessary  so  early  had  the  events  of  the  20th  not 
demonstrated  the  complete  inability  of  the  Government 
to  cope  with  the  situation. 

We  have  seen  that  money  put  out  for  bonds  was 
hoarded  either  by  the  savings  banks  or  by  individuals. 
This  fact  implies  that  they  did  not  get  into  the  hands  of 
those  whose  need  for  help  was  pressing.  The  reason  for 
this  lay  in  the  fact  that  the  government  terms  were  not 
hard  enough.  The  bonds  were  paid  for  in  legal  tenders, 
while  they  were  redeemed  at  their  par  value  in  gold. 
The  difference  between  the  premium  on  the  bonds  and 
the  premium  on  gold  was  less  than  2  per  cent.,  a  loss 
altogether  too  small  to  prevent  those  who  could  have 
gotten  on  without  the  money  from  selling  their  bonds 
and  hoarding  the  proceeds.  This  is  the  true  meaning  of 
the  Secretary's  remark  that  his  disbursements  aided  many 
savings  banks. 

Finally,  it  is  worthy  of  note  that,  in  spite  of  all  efforts, 
the  panic  of  1873  ran  its  course.  It  can  not  properly  be 
said  to  have  been  checked.  The  reason  is  obvious;  what 
was  needed  was  a  reestablishment  of  confidence  in  the 
enterprises  which  had  been  the  primary  source  of  dis- 
trust; but  no  amount  of  money  disbursed  by  the  Gov- 
ernment could  produce  this  result. 


235 


National     Monetary     Commission 

THE    CRISIS   OF    1884. 

The  crisis  of  1884  was  largely  a  disturbance  of  the 
market  for  securities.  This  was  the  culmination  of  the 
period  of  prosperity  which  had  marked  the  recovery  from 
the  panic  of  1873.  There  had  been  a  decline  in  prices  for 
some  three  years  and  a  good  deal  of  speculation  in  rail- 
road securities.  The  failure  of  certain  banks  and  brokers 
in  May  brought  on  the  panic.  Distress  was  felt,  of  course, 
throughout  the  country;  but,  as  remarked  above,  this 
crisis  was  rather  a  panic  in  the  market  for  securities,  espe- 
cially in  the  principal  cities.  The  Secretary  resorted  to 
some  of  the  usual  devices,  especially  the  prepayment  of 
some  of  the  debt  which  was  soon  to  mature.  The  crisis 
presents  no  features  of  unusual  interest. 

THE   STRINGENCY    OF    1890. 

The  next  important  general  crisis  was  that  of  the  autumn 
of  1890.  Various  causes  had  been  at  work  promoting 
speculation  in  various  parts  of  the  world  for  some  time 
before.  In  this  country  the  prospective  action  of  the 
McKinley  tariff  had  brought  about  a  large  increase  of 
imports  for  speculative  holding,  and  the  payment  of 
duties,  immediate  and  prospective,  threatened  to  lock  up 
so  great  an  amount  of  money  as  to  cause  a  stringency. 
Moreover,  there  was  much  speculation  based  on  the  pros- 
pect of  inflation,  which,  it  was  supposed,  would  soon  be 
produced  by  new  legislation  concerning  silver.  These 
sanguine  hopes  were  doomed  to  disappointment,  however. 
"The  silver  bill  was  passed,  and  the  Treasury  let  out 
enormous  amounts  of  cash.     But  the  effects  were  not  as 


236 


Independent   Treasury  of  the    United   States 

expected.  The  supplies  of  currency  had  only  a  tempo- 
rary effect  in  easing  money.  Silver  certificates  °-  rose  to 
121  in  August,  but  are  now  down  to  103,  notwithstanding 
the  heavy  government  purchases  in  the  interval.  Stock 
exchange  values,  with  great  pertinacity,  declined  instead 
of  advancing,  till  finally  this  week  the  crisis  came.  Thus 
once  again  has  it  been  demonstrated  that  legislative  edicts 
can  not  arrest  the  tendency  of  natural  laws,  and  that  some- 
thing more  than  a  flood  of  currency  is  needed  to  secure 
permanent  ease  in  the  money  market. "  *  In  this  dubious 
state  of  the  public  mind  the  failure  of  the  Barings  in  Eng- 
land occurred  .in  November,  and  for  a  time  threatened  to 
cause  a  panic.  The  excitement  calmed  down,  however, 
under  the  prompt  and  efficient  management  of  the  failure 
by  the  Bank  of  England.  But  while  a  panic  was  averted 
the  market  continued  very  restricted,  and  business  suffered 
from  the  evils  of  a  crisis.  So  great  was  the  stringency  that 
"the  banking  and  currency  machinery  of  the  country  was 
strained  to  its  utmost  and  worked  very  unsatisfactorily." 
The  lack  of  elasticity  in  our  currency  system  prevented  the 
banks  from  affording  the  relief  that  could  reasonably  have 
been  expected  from  them  under  a  better  system,  so  that, 
notwithstanding  the  unusually  large  disbursements  of  the 
Government,  they  were  compelled  to  resort  to  the  use  of 
clearing-house  certificates  in  the  settlement  of  their  bal- 
ances. As  usual,  the  aid  of  the  Secretary  of  the  Treasury 
was  invoked,  and  he  responded  with  the  purchase  of  bonds. 
In  fact.  Secretary  Windom  had  been  buying  bonds,  so  as  to 
prevent  a  stringency  in  the  fall,  as  early  as  July.     Under 

a  For  bar  silver  on  deposit. 

*  New  York  Commercial  and  Financial  Chronicle,  November  15,  1890. 

237 


National    Monetary     Commission 


circulars  issued  in  that  month  the  aggregate  purchases  of 
4  per  cent  and  4>^  per  cent  bonds  amounted  to  $10,358,950. 
As  this  disbursement  was  "inadequate  to  meet  existing 
conditions,"  a  circular  of  August  19  announced  that  ^]4 
per  cent  bonds  would  be  redeemed,  with  interest,  through 
May,  1 89 1.  On  August  21,  $20,000,000  of  these  bonds 
were  called  for,  on  condition  of  the  prepayment,  after  Sep- 
tember I,  1890,  of  all  interest  on  them  to  September,  1891. 
Twenty  millions  more  were  called  for  on  August  30;  and 
on  September  6  the  prepayment  of  interest  to  the  follow- 
ing July  was  offered  to  holders  of  4  percents  and  (after- 
wards) of  "  currency  sixes ; "  and,  finally,  on  the  13th  of 
September,  some  $17,000,000  more  of  4  percents  were 
redeemed.     The  transactions  are  tabulated  thus:** 


Under  circular  of — 

July  19.  1890 

August  19,  1890  .  .  . 
August  21,  1890  .  .  . 
August  30,  1890  .  .  . 
September  6,  1890. 
September  13,  1890 


Bonds  re- 
deemed. 


73,694,850 


Disbursements. 


$17 

324 

850 

$21 

225 

989 

46 

560 

050 

S8i 

138 

12 

20 

060 

700 

20 

964 

868 

42 

18 

678 

100 

19 

S18 

176 

83 

(a) 

12 

009 

951 

50 

17 

071 

ISO 

21 

617 

673 

77 

o  Interest  prepaid. 

In  addition  to  the  heavy  payments  for  bonds  the 
Treasury  made  large  disbursements  for  other  purposes 
also,  during  the  month  of  September,  and  its  net  available 
balance  was  reduced,  by  the  end  of  October,  to  a  little 
over  $2,000,000,  not  including  fractional  currency  and  the 
national  bank  redemption  fund.     The  tremendous  amount 

o-  Finance  Report,  1890. 
238 


Independent   Treasury  of  the   United   States 

of  money  reported  as  disbursed  in  the  purchase  of  bonds 
was  further  increased  by  the  ordinary  quarterly  payments 
in  September,  and  especially  by  the  very  large  disburse- 
ments for  pensions. 

It  must  be  borne  in  mind,  however,  that  not  all  the 
money  reported  as  disbursed  went  into  the  channels  of 
business  immediately.  The  net  gain  of  currency  to  com- 
merce, calculated  from  the  monthly  reports  of  the  Treas- 
ury holdings  of  money  was,  for  August,  $7,479,615,  and 
for  September,  $57,887,849,  allowing  for  the  gain  from 
silver  bullion  certificates,  and  for  the  decrease  in  national 
bank  circulation.*^  The  output  of  the  Treasury  in  August 
and  September  was  reflected  in  an  enlargement  of  the  New 

o  The  figures  for  September,  according  to  the  Chronicle,  were  as  follows: 
Net  holdings  of  the  United  States  Treasury. 


September  i. 


October  i. 


Gold  coin  and  bullion  .  .  . 
Silver  coin  and  bullion .  .  . 
Treasury  notes,  act  1890  . 

Legal-tender  notes 

National  bank  notes 

Fractional  silver 


5i8s. 837.581 
IS. 749. 535 

2. 233, 100 
10, 573. 710 

5,063, 227 
22, 077, 629 


$147,981.  732 

6, 590, 212 

962,500 

S. ?7S. 290 

4,  620,  511 

20,768,25s 


241, 534. 7«2 


186, 698, 500 


Loss  by  subtreasury  and  gain  to  commerce $54,  836,  282 

Silver    bullion    certificates    issued    during    the 

month $4,  460,  000 

National  bank  notes  retired i,  408,  433 

3.051,567 


Total  net  gain  to  commerce  for  the  month 57,  887,  849 

During  the  month  over  $10,000,000  were  actually  disbursed  for  pensions 
at  New  York;  $24,664,350  of  4>^per  cent  bonds,  and  $17,625,600  of  4  per- 
cents  were  actually  redeemed;  $4,524,190  were  paid  out  in  premiums  on 
bonds  purchased,  and  $13,410,001  in  interest  payments;  making  a  total  of 
$70,000,000. 


239 


National    M  o  n  e  t  ar  y     Commission 


York  bank  reserves,  as  shown  in  the  following  table,«  in 
the  face,  too,  of  a  drain  of  money  to  the  interior: 


August  9  .  .  .  . 
August  i6  .  .  . 
August  23  .  .  . 
August  30  .  .  . 
September  6 
September  13 
September  20 
September  27 


$406,  139,  500 
402, 163, 900 
397.672,  300 
392, 546, 400 
394.  978.  100 
393, 160, 100 
392, 631 , 600 
394,  029,  100 


Specie. 


$73. 496, 000 
70, 843, 200 
68, 621 , 100 
69, 595, 600 
70, 216, 700 
67.  842,  300 
76, 417, 200 
93, 397.300 


Legal  tenders. 


$29. 766. 300 
28, 378, 100 
26,  254,  200 
26, iss, 100 
25,  482,  000 
24.663,500 
22, 983, 700 
22,  387,  800 


Deposits. 


5407, 90s . 200 
399. 508. 100 
389.553. 100 
385, 149. 500 
388,399,300 

388,  250,  900 

389,  982,  800 
406,838,800 


The  rates  on   call   loans   ranged  through   August  and 

September  as  follows:^ 

August  4 8-4 

August  II 25-8 

August  18 16-  6 

August  25 12-2 

September  6 3-12 

September  13 c  3-  6 

September  20 '^2-6 

September  27 2-6 

The  rate  of  discount  on  call  loans  fell  after  the  Treasury 
disbursements,  as  seen  from  the  table.  The  net  result  of 
the  operations  of  the  Treasury  was  a  decided  relief  of  the 
money  market  in  September.  There  was,  as  yet,  no 
serious  disturbance  of  credit;  the  difficulty  was  to  get 
enough  money  to  meet  the  suddenly  increased  demand, 
and  the  governmicnt  disbursements  relieved  the  pressure. 

But  the  help  afforded  had  only  a  temporary  effect.  The 
stringency  recurred  in  November;  and  its  occurrence,  this 
time,   was  marked  by   a  failure  of  confidence  and  the 

«  The  figures  are  from  the  Financial  Chronicle. 
i>  The  Bankers'  Magazine, 
c  One-half  of  i  per  cent  a  day  commission. 
d  One-fourth  of  i  per  cent  a  day  commission. 

240 


Independent   Treasury  of  the   United   States 

appearance  of  distrust  due  to  the  announcement  of  some 
important  failures.  The  reserve  of  the  New  York  banks 
began  to  run  down  about  the  middle  of  Octol^er,  and  con- 
tinued to  do  so  until  the  second  week  of  December.  The 
figures  for  November  are: 


Specie. 


Legal  tenders. 


Deposits. 


November  i . 
November  8 . 
November  15 
November  22 
November  29 


$399.  791.900 
398,855,  700 
393.277.900 
387,  297,  200 
384,548,  100 


577,  671,  700 
74,  486,  600 
73.995.400 
73, 191, 200 
71,658,  500 


S22,  loi,  400 

21,  032,  500 
21, 816, 000 

22,  319,  800 
23.368, 400 


$396,  284,  500 
392.  253,  400 
386,  574,800 
381, 685, 000 
378,  578,  200 


The  state  of  the  money  market  for  the  same  month  is 
shown  by  the  rates  of  discount :  '^ 


Date. 

Discount  on — 

Commercial 
paper. 

Call  loans. 

7-8 
7-8 
7-8 
8-9 

6-  4 

186-is 

186-  6 

5-  3 

These  figures  show  that  the  panic  was  in  the  stock 
market,  and  not  in  business  enterprises  proper. 

So  great  was  the  stringency  brought  on  by  failure  of 
confidence  that  the  banks  of  New  York,  Philadelphia,  and 
Boston  issued  clearing-house  certificates,  and  there  was  a 
renewal  of  the  call  on  the  Government  for  assistance. 
But  the  available  surplus  of  the  Treasury  had  been  so 
heavily  drawn  on  by  previous  disbursements  that  Secre- 
tary Windom  was  not  able  to  do  much.     By  a  Treasury 

o  Figures  from  the  Bankers'  Magazine. 


41969° — i( 


-16 


241 


National    Monetary     C  ommis  s  to 


n 


circular  of  October  9,  a  standing  offer  was  made  to  redeem 
any  4^  per  cent  bonds,  offered  at  par,  with  interest  to 
maturity.  Nearly  $6,000,000*^  worth  were  redeemed  in 
October;  but  these  bonds  were  not  presented  during  the 
crisis  in  sufficient  amount  to  prevent  the  accumulation  of 
a  surplus  in  the  Treasury.  Accordingly,  Secretary  Win- 
dom  issued  a  circular  inviting  proposals  for  the  sale  of 
$5,000,000  of  4  per  cent  bonds,  redemption  to  be  made 
daily  beginning  with  December  8.  The  worst  of  the  crisis 
was  over  by  this  time,  however,  and  the  only  influence  of 
these  disbursements  was  to  facilitate  settlements. 

The  verdict  on  the  question  of  the  success  of  the  opera- 
tions of  the  Treasury  to  relieve  the  market  in  1 890  must  be 
that  it  was  on  the  whole  unsuccessful.  The  very  heavy 
disbursements  in  September  increased  the  bank  reserves 
and  accomplished  considerable  good,  because  the  elements 
of  distrust  had  not  widely  developed,  and  the  stress  of  the 
situation  was  due  simply  to  the  inadequacy  of  the  available 
supply  of  money  to  do  a  suddenly  enlarged  volume  of  busi- 
ness. But  the  bank  reser\'es  soon  decreased  again  by  the 
movement  of  currency  to  the  interior.  This  movement,  com- 
bined with  the  tendency  to  export  gold  under  the  prevailing 
high  rates  of  foreign  exchange,  renewed  anxiety  in  mone- 
tary circles.  The  ability  of  the  Government  to  furnish 
help  was  known  to  be  small,  and  instability  had  been 
revealed  in  many  establishments.  All  these  things  to- 
gether produced  distrust;  and  when  failure  of  confidence 
in  the  market  occurred,  the  efforts  of  the  Government 
proved  of  little  avail. 

"  $5,846,150. 


242 


Independent   Treasury  of  the   United   States 

The  principal  cause  of  the  failure  of  the  September  dis- 
bursements to  furnish  more  than  temporary  relief  to  the 
market  was  the  heavy  movement  of  money  to  the  interior. 
There  was  a  steady  drain  from  that  cause  all  through  the 
last  four  months  of  the  year,  with  the  exception  of  one 
week.  The  loss  to  the  banks  from  this  drain  aggregated 
$33,272,000,  for  September  and  October.  The  figures" 
in  detail  are: 

September  5 $3,  289,  000 

September  12 3,  310,  000 

September  19 4,  41 1, 000 

September  26 3,  933, 000 

October  3 5,  781,  000 

October  10 4,  752,  000 

October  17 3,  468,  000 

October  24 2,  038,  000 

October  31 2,  290, 000 

The  main  cause  of  the  failure  to  ease  the  market  in  the 
later  stage  of  the  crisis  was  hoarding,  which,  at  this  time, 
as  in  1873,  prevented  the  money  paid  out  of  the  Treasury 
from  going  into  the  banks,  where  it  would  have  been  of 
service  in  easing  the  market.  "A  conspicuous  feature  in 
the  monetary  situation,"  said  the  Financial  Chronicle,^ 
' '  is  the  unaccountable  disappearance  of  the  currency  issues 
made  during  recent  months.  Taking  September  and  Octo- 
ber together,  the  official  figures  of  the  Treasury  Depart- 
ment, which  are  no  doubt  correct,  show  that  the  currency 
afloat  in  the  country — that  is,  in  circulation — increased 
during  these  two  months  $62,934,675  net,  and  yet  our  New 
York  City  banks  held  on  November  i  only  $99,773,100  of 
different  kinds  of  currency,  against  a  total  of  $95,750,700  on 
August  30."     The  returns  of  the  banks  in  the  interior  of 

"From  the  Financial  Chronicle.  ''November,  1892. 

243 


National     Monetary     Commission 

the  country  showed  that  the  money  was  not  in  their  vaults, 
and  we  are  forced  to  conclude,  therefore,  that  it  was 
hoarded.  "■  The  inference  is  supported  by  the  fact  that  in 
the  first  week  of  the  new  year  the  banks  showed  an  increase 
of  reserv^e,  although  they  lost  money  both  to  the  interior 
and  to  the  sub  treasury.  ^ 

a  It  is  possible  that  the  money  was  in  slow  circulation,  in  the  hands  of 
merchants  who  were  increasing  their  stocks  in  anticipation  of  higher  prices 
under  the  new  tariff  law;  the  effect  on  the  money  market  would  be  the 
same. 

b  The  reserve  increased  from  $103,237,500  on  December  26  to  $105,- 
234,900  on  January  3,  a  gain  of  almost  $2,000,000.  The  net  loss  of  the 
banks  to  the  subtreasury  for  the  week  was  $100,000  and  to  the  interior 
$1,500,000. 


244 


Chapter  IX. — Treasury  Reuef  in  the  Crisis  of 
1893,  AND  THE  Breakdown  of  Treasury  Inde- 
pendence. 

THE  panic  of  1893. 

In  the  panics  of  1873,  1884,  and  1890  the  Treasury  had 
been  looked  to  for  assistance  to  the  money  market.  In 
the  panic  of  1893  conditions  were  reversed  and  the 
Treasury  was  obhged  to  rely  upon  the  banks  for  aid.  It 
is  true  that  bonds  were  issued  by  the  Government  in  this 
crisis,  but  they  were  issued  rather  for  the  purpose  of 
meeting  a  deficit  in  the  revenue  than  for  easing  the 
money  market.  The  latter  was  a  secondary  purpose. 
For  at  the  other  times  mentioned  there  was  a  surplus  in 
the  Treasury.  In  1893  the  revenue  had  fallen  off  so  that 
the  Treasury  was  confronted  with  a  deficit.  Moreover, 
the  Treasury^vas  at  the  mercy  of  the  public  in  the  matter 
of  the  loss  of  its  gold.  A  heavy  demand  for  the  redemp- 
tion of  notes  in  gold  began  in  December,  1892,  and  con- 
tinued to  the  close  of  the  fiscal  year.  More  than  ten 
times  as  many  United  States  notes  were  redeemed  in  the 
fiscal  year  1893  as  in  the  preceding  year,  and  more 
than  fifteen  times  as  many  treasury  notes  of  1890. 

In  another  respect,  also,  the  situation  was  different 
from  that  at  previous  times.  Our  currency  legislation, 
always  vicious  from  the  time  of  the  civil  war,  was  pecu- 
liarly so  in  the  early  nineties.  In  1890  the  silver-pur- 
chase act  was  put  upon  the  statute  books,  whereby  the. 
Secretary    of   the    Treasury    was    required    to    purchase 

245 


National     Monetary     Commission 

4,500,000  ounces  of  silver  each  month,  or  so  much  of 
that  amount  as  should  be  offered.  The  law  had  pre- 
viously required  the  purchase  of  between  $2,000,000  and 
$4,000,000  worth  of  silver  bullion  per  month,  to  be  paid 
for  in  legal-tender  notes.  Under  this  law  the  treasury 
notes  increased  for  the  next  two  years  about  $50,000,000 
annually.  The  amount  of  silver  and  its  representatives 
in  the  country's  circulation  had  risen  from  8.9  per  cent 
in  1882  to  28.9  per  cent  in  1892.  Nearly  the  entire 
increase  in  the  currency  in  twelve  years  was  in  silver." 
The  inflation  of  the  currency,  with  other  forces  then  at 
work,  soon  brought  the  coimtry  to  the  verge  of  disaster. 

The  great  surplus  revenues  of  the  later  eighties  had 
been  used  in  redeeming  bonds.  As  early  as  1887,  with 
increasing  revenue,  the  bonds  which  the  Treasurer  could 
purchase  at  par  were  exhausted  and  redemptions  at  a 
premium  were  begun.  Within  a  year  the  Treasury  held 
an  amount  of  money  in  its  cash  surplus  equal  to  nearly 
one-fourth  the  total  outside  circulation.  In  that  year 
the  Secretary  purchased  more  than  $50,000,000  worth  of 
4  per  cent  bonds  at  premiums  ranging  between  23  and 
29,  and  also  $33,000,000  of  4^  percents  at  a  premium  of 
between  6  and  9  per  cent.  Indeed,  within  four  years, 
from  1888  to  1892,  the  Government  expended  about 
$235,000,000  for  bond  redemption  above  the  amount 
which  was  expended  for  purchases  for  the  sinking  fund. 

One  consequence  of  this  policy  was  to  reduce  the  num- 
ber and  raise  the  price  of  the  bonds  available  as  a  basis 
of  national-bank  circulation,  and  consequently  the  circula- 

'1  P.ankers'  Magazine,  February,  1893,  573. 
246 


Independent   Treasury  of  the   United   States 

tion  of  the  national  banks  began  to  decrease.  In  1892, 
however,  the  replacement  of  the  surplus  with  a  deficit 
led  to  the  abandonment  of  bond  purchases,  thus  checking 
the  retirement  of  national  bank  notes.  At  the  same 
time  the  silver  legal-tender  issues  were  rapidly  increasing. 
These  processes  gradually  produced  an  inflated  currency. 
As  usual,  gold  began  to  be  exported,  as  much  as  $70,000,- 
000  going  abroad  in  the  first  six  months  of  1891.  Among 
other  occurrences,  the  gold  reserve  rapidly  fell  during 
the  latter  half  of  the  year.  In  the  first  six  months  of 
the  following  year,  1892,  $41,500,000  of  gold  went  abroad, 
followed  by  the  export  of  from  $2,000,000  to  $7,000,000 
a  week  through  the  months  of  July  and  August.  As 
early  as  May  of  this  year  the  gold  reserve,  whose  mini- 
mum was  the  traditional  $100,000,000,  fell  to  $114,- 
000,000.  The  gold  receipts  of  the  Treasury  from  cus- 
toms payments  had  rapidly  diminished,  for  the  silver 
paper  had  driven  it  out  of  the  country,  so  that  more  and 
more  legal  tender  appeared  in  the  bank  reserves  and  in 
the  receipts  of  the  Government.  In  the  aggregate  the 
bank  reserves  were  largely  changed.  For  many  years 
the  banks  had  supplied  practically  all  the  gold  needed 
for  export;  now  their  reserves  consisted  so  largely  of 
legal-tender  paper  that  they  were  obliged  to  turn  this 
into  the  Treasury  for  gold,  to  satisfy  their  customers 
who  needed  the  metal  to  send  abroad.  At  the  same  time 
the  gold  receipts  of  the  Treasury  itself  were  falling  ofi". 
The  extent  to  which  this  process  was  going  on  is  strik- 
ingly shown  by  the  fact  that,  while  in  the  twenty-two 
years  following  1879  only  $34,000,000  of  United  States 


247 


National     Monetary     Commission 

legal-tender  notes  had  been  presented  to  the  Treasury  for 
redemption,"  in  the  last  month  of  1892  and  the  first 
month  of  1893  the  Treasury  was  called  upon  to  supply 
more  than  $25,000,000  in  gold,  in  return  for  legal  tenders, 
for  the  purpose  of  export.  At  the  end  of  the  latter 
month  the  gold  reserve  had  fallen  to  $108,000,000.^ 

So  acute  did  the  situation  become  that  the  Secretary 
of  the  Treasury  requested  the  New  York  banks  to  supply 
gold  in  exchange  for  legal  tenders,  and  they  did  so  to 
the  extent  of  nearly  $8,000,000.^  In  the  two  following 
months  the  banks  gave  up  about  $25,000,000  more, 
while  almost  the  same  amount  was  taken  out  of  the 
Treasury  by  the  redemption  of  legal  tenders  for  export. 
In  April  the  reserve  fell  to  the  legal  minimum,  and  for 
the  first  time  the  issue  of  gold  certificates  ceased. 

When  Secretary  CarHsle  took  up  the  Treasury  port- 
folio, succeeding  Mr.  Foster,  in  March,  the  gold  reserve 
stood  at  $100,982,410,  and  the  other  money  in  the 
Treasury  amounted  to  $25,000,000.'^  Public  apprehen- 
sion as  to  the  decrease  in  the  gold  reserve  was  becoming 
acute.  The  Treasury  was  in  the  position  of  a  bank 
which  had  issued  more  notes  than  it  had  reserves  to 
redeem.  The  situation  was  made  more  difficult  by  a 
statement  from  the  Secretary  of  the  Treasury  in  April, 
which  raised  doubt  in  the  public  mind  as  to  the  con- 
tinuance of  the  policy  of  redeeming  silver  notes  with 
gold,  and  it  was  necessary  for  President  Cleveland  to 
reassure  the  public  on  this  point. 

a  Finance  Report,  1893,  13. 

^  Ibid,  12  and  96. 

c  Commercial  and  Financial  Chronicle,  February  11,  1893. 

<^  Finance  Report,  1893,  96. 

248 


Independent   Treasury  of  the   United   States 

Increased  congressional  appropriations  had  destroyed 
the  surplus  and  left  the  Treasury  with  a  deficit  for  ordi- 
nary expenses.  Moreover,  its  income,  as  has  been 
remarked,  was  very  largely  in  paper.  The  deficit  drove 
the  Secretary  to  draw  on  the  gold  reserve  to  meet  ordi- 
nary expenses.  Thus  there  was  a  double  drain  upon 
the  reserve,  to  meet  current  expense  and  to  redeem 
legal  tenders.  By  February  the  crash  had  come  in  the 
business  world  with  the  bankruptcy  of  the  Philadelphia 
and  Reading  Railway  Company  on  the  26th  of  the  month. 
The  failure  of  the  National  Cordage  Company  followed 
in  May,  the  public  began  to  hoard,  and  the  banks  began 
to  totter.  The  severest  panic  came  in  midsummer. 
The  banks  had  liquidated  their  balances  heavily  in 
June  and  July  and  the  reserve  of  the  New  York  banks 
decreased  more  than  $40,000,000.  Call  loans  went  to 
74,  and  money  could  not  be  borrowed  on  time  at  all. 
The  banks  were  forced  to  resort  to  the  use  of  clearing- 
house certificates  and  some  of  them  refused  to  cash 
the  checks  of  their  own  depositors.  During  the  year 
about  578  banks,  trust  and  mortgage  companies  through- 
out the  country  failed,  158  of  them  being  national  banks. 
On  account  of  its  deficit,  the  Treasury  was  unable  to  aid 
the  banks,  and  as  a  bank  of  issue  it  was  not  strong 
enough  to  maintain  its  own  credit. 

The  breakdown  of  credit  made  the  importation  of 
gold  impossible  for  a  time,  and  in  August  a  premium 
appeared  not  only  on  the  metal,  but  on  currency.  This 
in  turn  made  importation  possible,  and  the  tide  began 
to  turn.  Meantime  Congress  met  in  special  session 
in  August,  and  the  public  demanded  the  repeal  of  the 

249 


National     Monetary     Commission 

silver  purchase  act.  This  was  done,  and  the  reassuring 
effect  on  the  pubHc  mind,  together  with  some  impor- 
tation of  gold  to  take  advantage  of  the  premium,  in  a 
measure  restored  confidence.  After  the  crisis  had  passed 
the  hoarded  currency  came  into  circulation  again,  gold 
began  to  appear  in  government  receipts,  and  the  reserve 
rose  in  August  to  a  little  over  $103,000,000.  By  October 
it  had  fallen  again,  however,  to  $81,501,385."  This  was 
due  mainly  to  the  deficit  in  revenue. 

In  December  the  reserv-e  was  $80,000,000;*  in  Janu- 
ary of  the  following  year  it  had  fallen  below  $68,000,000.^ 

BOND    SALES,   1894    TO    1 898. 

It  was  necessary,  therefore,  to  resort  to  a  bond  issue 
and  $50,000,000  of  5  per  cent  bonds  were  offered  to  the 
public  at  the  price  of  117.223,  which  was  equivalent  to  a 
3  per  cent  bond  at  par.  The  loan  was  not  subscribed  for 
by  the  public,  and  a  few  days  before  the  time  for  closing 
the  books  the  banks  were  appealed  to,  as  they  had  been 
before,  and  they  took  up  the  issue,  the  banks  of  New  York 
City  alone  taking  80  per  cent  of  them.  The  sale  netted 
the  Treasury  $58,660,000  of  gold;  but  of  this  amount  the 
Treasury  had  itself  supplied  $24,000,000  in  the  redemp- 
tion of  greenbacks,  so  that  by  the  sale  of  bonds  it  made  a 
net  gain  of  only  $34,000,000.  Still  the  reserve  rose  to 
$107,000,000  in  the  first  week  in  March,  but  exportation 
of  gold  began  the  following  month,  the  "endless  chain "  of 
redemption  of  legal  tenders  again  was  put  in  motion,  and 
the  reserve  fell,  in  August,  to  $5 2, 189, 500. '^     Again  the 

a  Finance  Report,  1893:  Ixxiii.  c  Finance  Report,  1894:  Ixviii. 

b  Finance  Report,  1894:55.  d  Finance  Report,  1894:  Ixix. 

250 


Independent   Treasury  of  the   United   States 

banks  were  appealed  to  for  gold  in  exchange  for  notes 
and  surrendered  $15,000,000.  Another  bond  sale  was  re- 
sorted to  in  November,  and  again  was  a  failure  in  replen- 
ishing the  gold  supply  of  the  Treasury,  because  most  of 
the  gold  used  in  the  purchase  of  the  bonds  was  obtained, 
either  in  the  beginning  or  later,  from  the  Treasury  itself 
in  exchange  for  legal  tenders. 

"The  first  loan  of  1894  had  failed  of  its  purpose  within 
ten  months;  the  second  had  failed  within  ten  weeks,  and, 
outside  the  loan  market,  no  recourse  was  left  to  the  Gov- 
ernment."" 

In  January,  1895,  the  "endless  chain"  was  again  oper- 
ating, and  the  Treasury  lost  in  exchange  for  legal  tenders 
$45,000,000  in  gold.  The  following  month  the  reserve  fell 
to  $41,340,181  and  throughout  the  month  fell  off  in  the 
neighborhood  of  $2,000,000  a  day. 

In  the  face  of  these  conditions  it  became  imperative  for 
the  Government  to  take  some  measures  to  save  itself  not 
only  from  bankruptcy,  but  from  the  utter  destruction  of 
its  credit.  The  banks  of  the  country  had  supplied  all  the 
gold  they  could  spare.  The  state  of  credit  and  foreign 
trade  made  importation  of  the  yellow  metal  out  of  the 
question.  After  tying  its  fortunes  to  those  of  the  banks 
and  nearly  wrecking  their  credit  with  its  own,  until  they 
could  no  longer  respond  to  the  stimulus  of  public  opinion 
by  supplying  gold,  the  Government  turned  to  the  inter- 
national bankers.  Thoroughly  convinced  that  the  situa- 
tion was  desperate  and  that  no  usual  remedy  would  avail. 
President  Cleveland  made  arrangements  with  the  famous 
bond  syndicate  of  1895  to  pull  the  Government  out  of  its 

«  Noyes,  A.  D.,  Forty  Years  of  American  Finance:  232. 
251 


National     Monetary     Commission 

difficulties.  An  arrangement  was  made  with  J.  P.  Morgan 
&  Co.,  and  H.  P.  Belmont  &  Co.,  whereby  they  should 
take  $50,000,000  of  4  per  cent  thirty-year  bonds  at  104^^. 
The  terms  of  the  loan  were  severe.  Yet  it  must  be  con- 
ceded that  the  risk  which  the  purchasers  ran  of  failing  in 
their  attempt  to  supply  the  Treasury  with  gold  was  so 
great  that  they  were  justified  in  making  hard  terms. 
The  policy  of  the  country  whose  credit  they  were  seeking 
to  save  was  hostile  to  them  and  their  attempt.  The 
syndicate  agreed  to  supply  at  least  half  of  the  gold  to  be 
paid  for  bonds  from  Europe,  and  further  agreed  not  to 
withdraw  gold  from  the  Treasury  nor,  so  far  as  they  could 
prevent  it,  to  permit  others  to  do  so,  for  the  purchase  of 
these  bonds.  In  accordance  with  their  agreement,  the 
syndicate  delivered  300,000  ounces  of  gold  each  month  for 
the  next  six  months.  In  consequence  the  gold  reserve 
rose  until,  in  July,  it  was  $107,571,230.  The  first  effort 
of  the  syndicate  was  successful,  because  a  speculative 
fever  happened  to  break  out  in  England  which  caused  a 
demand  for  United  States  securities.  Their  purchase  of 
course  promoted  the  importation  of  gold.  Later  specula- 
tion became  active  among  ourselves.  As  a  consequence 
there  was  a  rise  in  the  price  of  our  securities  which  led 
foreign  holders  to  sell  what  they  had  bought  a  little  while 
before,  and  thereby  reversed  the  conditions  of  the  gold 
market.  _This  result  was  furthered  also  by  the  foreign 
exchange  rate  which  had  been  fixed  by  the  syndicate,  for 
nonbanking  corporations  and  individuals  could  go  into 
the  foreign  exchange  market  and  sell  drafts  below  the 
syndicate's  figure.  They  covered  these  drafts  by  drawing 
gold  from  the  Treasury  with  legal  tenders. 

252 


Independent   Treasury  of  the    United   States 

During  the  five  months  following  July  $65,000,000  of 
gold  were  thus  withdrawn,  and  the  reserve  fell  to 
$63,000,000  in  December."  The  syndicate  was  unable  to 
control  the  situation  toward  the  end  of  its  contract,  but 
did  what  it  could  to  aid  the  Treasury  by  exchanging  gold 
for  notes.  It  was  found  necessary  in  January  of  the 
following  year,  1896,  to  go  into  the  money  market  again. 
The  Secretary  offered  for  sale  the  large  sum  of  $100,000,000 
4  per  cent  bonds  to  be  paid  for  in  gold.  The  loan  proved 
popular,  4,640  individual  bids  being  received,  aggregating 
$568,000,000.  It  was  high  time,  for  in  February  the  gold 
reserve  reached  the  low  point  of  $44,563,493.  The  pro- 
ceeds of  the  loan  raised  it  in  the  following  month  to 
$128,713,709,  and  the  crisis  was  passed.  There  was  no 
further  trouble  for  the  next  two  or  three  years,  and  the 
reserve  reached  the  great  sum  of  $245,000,000  by  the  mid- 
dle of  1898. 

The  lesson  of  these  extremely  trying  times,  for  our 
purpose,  is  significant.  We  have  seen  the  Treasury 
aiding  the  banks  in  the  other  ^ises  described ;  here  the 
Treasury  was  dependent  upon  the  banks.  Its  difficulties 
arose  partly  from  the  insufficiency  of  the  current  revenue 
and  partly  from  the  fact  that  it  was  engaged  in  note 
issue.  The  insufficiency  of  the  revenue  made  it  necessary 
for  the  Secretary  of  the  Treasury,  illegally  as  some 
thought,  to  draw  on  the  gold  reserve  for  ordinary  expenses. 
At  the  same  time  he  needed  the  gold  to  redeem  legal 
tenders.  They  were  forced  upon  him  for  redemption 
because  their  number  was  so  largely  increased  under 
the  operation  of  the  silver-purchase  act.     Since  the  only 

(^  Treasury  Report,  1895:  51. 
253 


National     Monetary     Commission 

ways  at  the  command  of  the  Government  for  obtaining 
gold  are  in  receipts  of  revenues  or  by  borrowing,  as 
soon  as  the  revenues  fell  off,  resort  was  had  to  the  latter 
method.  It  is  to  be  noticed,  however,  that  in  trying  to 
place  its  loans  the  Treasury  found  it  impossible  to  dis- 
associate itself  from  the  banks.  Several  times  it  was 
obliged  to  take  the  humiliating  position  of  appealing  to 
the  banks  to  favor  it  with  an  exchange  of  gold  for  notes. 
At  other  times  it  was  obliged  to  act  through  the  banks 
in  placing  its  loans.  At  the  time  of  greatest  distress  and 
hardship  it  was  forced  to  appeal  to  a  group  of  bankers 
outside  the  usual  circle  of  its  dealings,  not  merely  to 
place  its  bonds,  but  to  fiurnish  it  with  revenue  to  save  its 
credit. 
I  We  see,  therefore,  that  in  this  crisis  the  Treasury 
7  disturbed  the  money  market,  not,  however,  in  the  usual 
way  by  pouring  in  its  surplus  revenue,  but  by  drawing 
on  the  reserves  of  the  banks  at  a  time  when  the  banks 
themiselves  sorely  needed  them,  making  drafts  upon  the 
banks  necessary  by  the  Government's  own  vicious 
policy.  As  a  banking  institution  the  Treasury  was  a 
failure. 

In  conclusion,  we  may  say  that  in  the  crisis  of  1893 
the  Treasury  failed  (i)  to  maintain  its  own  credit;  (2)  to 
keep  the  gold  reserv^e  intact;  (3)  to  protect  itself  against 
attacks  of  money  brokers;  (4)  to  place  its  own  loans 
directly.  Incidentally,  attention  might  be  called  not 
inappropriately  to  the  mischief  done  by  Secretary  Car- 
lisle's ill-advised  personal  views  and  statements  of  policy. 
It  is  an  illustration  of  the  danger  of  leaving  the  domina- 
tion of  the  money  market  so  largely  in  the  hands  of  the 

Secretary. 

254 


Chapter  X. — Treasury  Relief  in  the  Panic  of  1907. 

The  next  important  disturbance  of  the  money  market 
was  the  panic  of  1907.  Following  the  slight  disturbance 
of  1903,  there  sprung  up  in  1905-6  a  world-wide  specula- 
tion and  inflation  of  credit.  The  year  1906  saw  panics  in 
Egypt,  Japan,  Hamburg,  and  Chile,  before  the  storm  broke 
upon  ourselves.  It  is  not  the  purpose  of  this  essay  to 
write  a  financial  history  of  the  time  and,  therefore,  it  is 
not  necessary  to  give  a  history  of  the  panic.  Our  present 
concern  is  with  the  relation  of  the  Treasury  to  crises. 
Accordingly,  we  pass  over  very  rapidly  and  lightly  the 
details  of  the  panic. 

While  cautious  observers  had  earlier  seen  signs  of  a  com- 
ing storm  in  the  midst  of  general  confidence,  the  public  at 
large  saw  but  little  out  of  the  way  until  the  failure  of  one 
of  the  large  iron  manufacturing  houses  of  the  country,  in 
the  month  of  June,  with  liabilities  of  $8,000,000.  A  few 
weeks  afterwards  two  New  York  City  loans  which  were 
offered  on  the  market  failed,  showing  that  the  investing 
public  was  exceedingly  cautious  and  that  credit  was 
strained.  In  the  early  fall  the  New  York  City  street 
railvv^ay  combination  went  into  the  hands  of  a  receiver, 
as,  a  little  later,  did  the  Westinghouse  Electric  Company. 

During  the  process  of  credit  inflation  which  went  on  for 
a  year  or  two  before  1907,  an  occurrence  had  taken  place 
in  banking  circles  which  was  fraught  with  great  danger. 
This  was  the  organization  of  chain  banking,  as  it  has  been 
called.  Some  men  interested  in  speculation  in  industrial 
and  mining  securities  obtained  control  of  one  bank.     With 

255 


National     Monetary     Commission 

the  stock  of  this  in  their  possession  they  borrowed  upon  it 
as  collateral  and  with  the  proceeds  of  the  loan  bought 
stock  of  another  bank.  They  repeated  this  process  until 
six  or  more  banks  were  under  their  control.  The  funds  of 
these  banks  were  of  course  used  for  the  promotion  of  indus- 
trial speculation  in  which  those  in  control  of  them  were 
interested.  This  use  of  commercial  banks,  it  may  be  said, 
is  the  most  vicious  feature  of  our  recent  American  banking 
practice.  The  confidence  of  the  public  in  banking  man- 
agement has  been  more  severely  shaken,  perhaps,  by  the 
practice  of  using  commercial  banks,  not  for  commercial 
purposes,  but  for  the  promotion  of  industrial  and  financial 
enterprises,  than  by  any  other  evil  in  our  banking  practice. 

In  due  time  one  of  these  chain  banks  found  itself  in 
difficulty  in  meeting  its  obligations,  under  its  condition  of 
expanded  discounts.  Therefore  it  applied  to  the  clearing 
house  for  help.  Of  course,  this  event,  which  occurred  on 
October  i6,  aroused  uneasiness.  On  the  21st  of  the  same 
month  the  great  failure  of  the  Knickerbocker  Trust  Com- 
pany occurred,  with  liabilities  of  $35,000,000  owing  to 
17,000  depositors.  In  a  few  days  the  Lincoln  Trust  Com- 
pany and  the  Trust  Company  of  North  America  were  also 
in  trouble  and  the  feeling  of  public  uneasiness  became  a 
panic. 

When  Mr.  George  B.  Cortelyou  became  Secretary  of  the 
Treasury  in  March,  1907,  he  soon  became  aware  that  the 
money  market  was  unsettled  and  he  was  duly  called  upon 
to  interfere  with  Treasury  reser^^es  for  the  relief  of  the 
market.  In  the  latter  part  of  August  the  Secretary  offered 
to  make  weekly  deposits  in  the  national  banks  "with  a 
view  of  facilitating  the  movement  of  the  crops  in  various 

256 


Independent   Treasury  of  the   United  States 

sections  of  the  country."  At  the  end  of  July  the  national 
banks  had  $156,990,204  of  the  public  money.  Beginning, 
therefore,  on  August  28  and  continuing  until  October  14, 
the  Secretary's  plan  of  making  weekly  deposits  was  fol- 
lowed until  a  total  of  about  $28,000,000  had  been  allotted 
to  banks  in  each  of  the  forty-six  States,  in  the  Territories, 
and  in  the  District  of  Columbia.  "Every  endeavor  was 
made,  from  information  and  requests  at  hand,  so  to  dis-' 
tribute  this  fund  that  it  would  meet  the  actual  needs  in 
sections  where  the  business  activity  was  at  a  maximum 
and  currency  was  most  urgently  required. "« 

On  the  24th  of  October  a  panic  broke  upon  the  stock 
exchange  and  the  rate  on  demand  loans  rose  to  125. 
Through  the  efforts  of  individual  financiers,  the  banks  of 
the  city,  which  naturally  were  holding  tightly  to  their  funds, 
decided  to  release  $25,000,000.  On  the  26th  the  clearing- 
house banks  resorted  to  the  familiar  device  of  issuing  loan 
certificates,  with  the  result  that  cash  payments  were  prac- 
tically suspended.  Meantime  the  interior  banks  were 
calling  for  their  balances,  and  the  net  loss  of  the  New  York 
banks  on  this  account,  between  October  26  and  December 
7,  was  $106,921,700. 

During  the  ten  days  from  October  21  to  31  the  Treasury 
transferred  to  the  national  banks  of  the  city  $37,597,000, 
which  the  banks  immediately  advanced  to  the  trust 
companies  to  meet  the  run  on  them.  In  order  to  aid  the 
banks  in  meeting  the  demand  of  the  interior  for  currency, 
the   Treasury   Department   in  three  days  furnished   the 

"Response  of  the  Secretary  of  the  Treasury  calling  for  certain  infor- 
mation in  regard  to  Treasury  operations,  etc.,  S.  Doc.  208,  60th  Cong., 
I  St  sess. 

41969°— 10 17  257 


National     Monetary     Commission 

New  York  banks  about  $36,000,000  in  small  bills.  "As 
the  stringency  progressed  the  Treasurer  gave  relief  in 
every  important  locality  where  assistance  seemed  to  be 
required."''  Meantime  hoarding  set  in  to  such  an  extent 
that  it  is  estimated  that  in  the  neighborhood  of 
$296,000,000  disappeared  from  circulation  during  the 
panic.  To  meet  the  difficulties,  besides  the  usual  clearing- 
house certificates,  emergency  currency  was  issued  by  the 
clearing-house  banks  and  by  individual  manufacturers 
and  corporations.  So  severe  became  the  crisis  that  there 
even  was  a  demand,  which,  strange  to  say,  received  some 
support  from  respectable  quarters,  for  a  Government  issue 
of  fiat  money,  so  accustomed  had  the  money  market 
become  to  relying  upon  the  Treasury.  By  the  middle 
of  November  the  Treasury  had  deposited  in  the  banks 
all  the  money  it  could  spare;  indeed,  it  had  reduced 
its  working  surplus  to  about  $5,000,000.  Meantime, 
as  the  Secretary  tells  us,''  considerable  difficulty  was 
experienced  in  bringing  from  the  subtreasuries  to  the 
New  York  office  money  actually  collected  and  the  public 
revenue  was  falling  off. 

Further  to  relieve  the  situation,  therefore.  Secretary 
Cortelyou  notified  the  national  banks  that  they  might 
substitute  "bonds  suitable  for  savings-banks  investments 
for  government  bonds  which  were  held  as  securities 
against  public  deposits."^  The  Secretary's  purpose  in 
doing  this  was  the  same  as  that  of  Secretary  Shaw  in 
resorting  to  the  same  device  four  years  previously.     He 

a  Response  of  the  Secretary  of  the  Treasury  calling  for  certain  infor- 
mation in  regard  to  Treasury  operations,  etc.,  S.  Doc.  208,  60th  Cong., 
ist  sess.,  7. 

&Ibid.,  10. 

258 


Independent   Treasury  of  the    United    States 

wished  to  increase  the  volume  of  United  States  bonds 
available  for  circulation.  Under  this  stimulus  the  circu- 
lation of  the  national  banks  increased  by  December  31, 
1907,  to  $83,012,153.  Still  the  difficulty  of  obtaining 
bonds  and  the  awkward  machinery  of  administration  in 
issuing  national-bank  notes  had  the  usual  result  of  making 
the  increase  of  circulation  virtually  ineffective  until  after 
the  need  for  it  had  passed  away.  The  volume  of  national- 
bank  currency  increased  by  $24,009,000  between  October 
15  and  November  15,  but  at  the  close  of  the  year,  as  we 
have  seen,  it  had  risen  much  more.  The  circulation  con- 
tinued to  increase,  however,  although  the  demand  for  it 
no  longer  existed,  until,  about  the  middle  of  January,  it 
became  $695,927,806. 

Of  course  the  usual  effect  on  the  price  of  bonds  followed. 
The  increased  demand  drove  up  the  2  per  cent  bonds  as 
high  as  no,  and  even  at  that  price  the  amount  available 
was  regarded  as  too  small.  Accordingly  the  Secretary 
thought  it  necessary  to  adopt  additional  means  to  relieve 
the  situation,  and  on  November  17  he  offered  a  loan  of 
$50,000,000  in  Panama  Canal  bonds  under  authority  of  the 
act  of  June  28,  1902,  and  $100,000,000  of  3  per  cent  cer- 
tificates of  indebtedness  under  the  act  of  June  30,  1898. 
Of  the  bonds  only  $24,631,980  were  taken  by  the  public 
and  $15,436,500  of  the  loan  certificates.  It  is  a  little 
difficult  to  understand  the  reason  for  this  action  unless 
the  Secretary  hoped  to  sell  the  bonds  and  securities  to 
people  who  were  hoarding  money.  Of  course  the  pur- 
chase of  these  securities  by  the  banks,  or  by  people  who 
were  not  hoarding,  simply  reduced  the  circulation  and 
would  have  made  the  situation  worse.     In  order  to  avoid 

259 


National     Monetary     Commission 

this,  however,  the  Secretary  transferred  part  of  the 
purchase  money  to  the  banks.  Therefore,  with  one  hand 
he  was  withdrawing  money  from  circulation  in  payment 
of  his  bonds  and  with  the  other  was  restoring  it  by  depos- 
iting it  in  the  banks.  The  banks  which  purchased  these 
securities  were  allowed  to  retain  90  per  cent  of  the  pur- 
chase price  of  the  Panama  bonds  as  a  deposit  and  75 
per  cent  of  that  of  the  certificates. 

In  addition  to  these  positive  means  of  assistance  under- 
taken by  the  Secretary  of  the  Treasury,  the  Comptroller 
of  the  Currency,  fearing  that  a  revelation  of  their  condition 
would  add  to  the  panic  in  a  measure,  however,  postponed 
the  call  on  the  national  banks  for  a  report  in  November. 
This  action  operated  favorably,  because  the  banks  were 
putting  themselves  in  shape  to  meet  the  call.  The  delay 
made  them  more  cautious  in  making  discounts  and  lower- 
ing their  reserves.  Evidence  that  this  was  the  case  is 
found  in  a  statement  of  the  Secretary  himself  that  "the 
fact  that  a  call  had  been  made  and  a  report  submitted 
contributed  another  favorable  factor  to  the  situation 
immediately  afterwards  by  enabling  the  banks  to  release 
a  part  of  this  accumulated  cash  to  meet  the  pressing  needs 
of  their  clients,  with  the  knowledge  that  they  would  prob- 
ably be  able  fully  to  reinstate  their  reserves  before  another 
call  was  made  by  the  comptroller."" 

But  the  tide  had  turned  before  the  latter  measures  of 
the  Secretary  were  taken.  Early  in  December,  therefore, 
the  Secretary  called  upon  the  banks  to  return  part  of  the 

o  Response  of  the  Secretary  of  the  Treasury  calling  for  certain  infor- 
mation in  regard  to  Treasury  operations,  etc.,  S.  Doc.  208,  60th  Cong., 
1st  sess.,  12. 

260 


Independent   Treasury  of  the   United   States 

money  deposited  with  them.  In  that  month  $6,000,000 
were  retm^ned,  and  toward  the  end  of  January  $10,000,000 
more  were  called  in. 

Of  com-se  during  the  occurrence  of  these  events  the  gold 
movement  had  contributed  not  a  little  to  the  ultimate 
solution  of  the  difficulties.  Toward  the  end  of  October 
gold  began  to  come  from  Europe,  and  by  the  end  of  No- 
vember more  than  $100,000,000  of  the  metal  had  been 
received.  All  of  this,  together  with  about  $25,000,000 
additional,  went  from  the  New  York  banks  to  other  parts 
of  the  country. 

In  explaining  his  active  interference  with  the  situation, 
the  Secretary  tells  us  "  that  he  was  influenced  by  the  belief 
that  it  was  advisable  to  take  a  strong  and  resolute  step 
which  would  convince  the  public,  both  at  home  and 
abroad,  that  the  Government  was  thoroughly  alive  to  the 
situation  and  determined  to  give  its  aid  in  every  possible 
legal  and  proper  form.  This  is  a  plain  intimation  that  the 
public  and  the  banks,  as  well  as  the  government  officers 
themselves,  have  reached  a  point  where  they  regard  the 
Treasury  Department  as  a  proper  and  necessary  safety 
valve  in  monetary  stringencies.  The  fact  that  the  Treas- 
ury had  a  surplus  made  it  possible  for  the  Secretary  to 
intervene  with  more  success  than  was  the  case  in  1893. 
At  that  time,  as  we  have  seen,  the  Treasury  with  a  deficit 
in  the  revenue  was  appealing  to  the  banks  to  save  it.  In 
this  case  it  was  intervening  to  save  the  banks,  as  was 
supposed.     The  lesson  of  1893,  that  the  banks  were  able 

o  Response  of  the  Secretary  of  the  Treasury  calling  for  certain  infor- 
mation in  regard  to  Treasury  operations,  etc.,  S.  Doc.  208,  60th  Cong., 
ist  sess. 

261 


National     Monetary     Commission 

to  take  care  not  only  of  themselves,  but  of  the  Treasury 
also,  seems  not  to  have  made  any  impression  either  on  the 
public  or  on  government  officers.  The  Secretary  himself 
was  of  the  opinion  that  the  offer  of  Panama  bonds  and 
Treasury  certificates  restored  confidence.  The  facts  seem 
to  be  that  the  corner  had  been  turned  and  confidence 
restored  before  these  measures  were  taken. 

Secretary  Cortelyou  was  subjected  to  much  the  same 
criticism  for  issuing  these  bonds  as  Secretary  Carlisle  had 
been  fourteen  years  before,  though  with  much  better 
reason.  With  a  nominal  cash  balance  in  the  neighbor- 
hood of  $200,000,000,  it  seems  difficult  to  believe  that  the 
Treasury  was  justified  in  issuing  one-year  certificates 
which,  by  the  law  permitting  them,  could  be  put  out  only 
when  necessary  to  meet  the  expenses  of  the  Treasury.  To 
take  the  other  view,  is  to  admit  that  government  funds  on 
deposit  in  the  banks  were  not  available;  but  this  is  a  con- 
fession of  insolvency  on  the  part  of  the  banks.  The  fact 
is  that  the  Treasury  did  not  need  the  money  to  be  obtained 
from  the  sale  of  loan  certificates.  In  any  case,  even  if 
the  most  favorable  view  be  taken,  and  it  be  held  that  the 
Secretary's  construction  of  the  law  was  correct,  we  must 
admit  that  it  is  a  power  of  extreme  danger  that  is  thus 
conferred  upon  him. 

Before  passing  from  this  subject  attention  may  well  be 
called  to  the  method  of  allotment  of  the  new  issues  of 
securities.  The  2  per  cent  bonds  are  much  sought  after 
by  the  national  banks  as  a  basis  for  note  issue;  conse- 
quently the  award  of  the  loan  was  limited  in  the  first 
instance  to  national  banks  in  order  to  encourage  them  to 


262 


Independent   Treasury  of  the    United   States 

do  this.  The  Secretary  took  the  position  that  he  could 
have  Hmited  the  whole  award  to  this  class  of  bidders  if  he 
so  chose.  In  order,  therefore,  to  promote  additional  note 
issue  and  check  withdrawals  by  individual  depositors  from 
the  banks  to  pay  for  the  securities,  it  was  decided,  as  has 
been  said,  to  make  the  allotment  first  to  national  banks, 
in  the  case  of  the  Panama  bonds,  and  to  make  no  awards 
to  individuals  in  excess  of  $10,000. 

On  December  7 ,  public  deposits  aggregating  $222,352,252 
were  distributed  in  different  parts  of  the  country  as  fol- 
lows :  In  New  York  City,  26.8  per  cent  of  their  capital  and 
surplus;  in  New  England  and  the  eastern  and  middle 
western  banks,  including  New  York,  a  little  more  than 
1 5  per  cent ;  and  in  the  banks  of  the  Southern  and  Western 
Pacific  States,  about  18  per  cent.  These  percentages,  be 
it  noted,  are  the  percentages  of  deposits  of  public  money 
to  capital  and  surplus.  Putting  the  matter  in  another 
way,  the  banks  of  the  New  England  States  on  December 
7,  1907,  held  $13,358,544,  which  was  8  per  cent  of  their 
capital  and  surplus.  The  banks  of  the  Eastern  States 
held  $110,793,758,  or  18.3  per  cent  of  their  capital  and 
surplus.  Those  of  the  Southern  States  had  $31,813,914, 
or  1 6.8  per  cent  of  their  capital  and  surplus.  In  the  Middle 
Western  States  the  banks  had  $47,047,800,  or  13.7  per 
cent  of  their  capital  and  surplus.  The  Western  States 
had  $11,790,864,  and  those  of  the  Pacific  coast  had 
$16,939,419,  the  former  being  14.7  and  the  latter  24.3  per 
cent  of  capital  and  surplus.  The  total  number  of  banks 
holding  deposits  at  this  time  was  1,421.  The  Secretary 
made  a  specific  effort  to  make  a  geographical  distribution 


263 


National     Monetary     Commission 

"equitably."  In  doing  so,  however,  he  did  not  ignore 
the  particular  trade  movements  which  in  certain  sections 
of  the  country  created  special  demands  for  currency. 

In  this  panic  we  find  for  the  first  time  a  deliberate  and 
general  application  of  the  section  of  the  law  of  March  4, 
1907,  providing  that  the  Secretary  of  the  Treasury,  in 
depositing  public  money  in  the  banks,  shall  make  the 
distribution  as  equitable  as  possible.  As  has  been  pointed 
out  in  another  connection,  the  meaning  of  this  term  is 
difficult  to  determine.  The  only  considerations  which 
should  govern  the  Secretary  in  depositing  public  funds 
in  national  banks  are  convenience  and  safety.  The 
claims  of  political  friends,  geographical  distribution,  and 
other  similar  reasons  should  have  no  influence  whatever. 
It  is  conceivable  that  the  interests  of  the  country  would 
be  best  subserved,  under  some  conditions,  by  depositing 
the  whole  available  amount  of  public  money  in  the  banks 
of  a  single  place.  It  is  a  well-known  fact  that  money 
gravitates  to  money  centers.  From  the  small  places,  the 
outposts  of  the  business  world,  it  simply  returns  to  the 
business  centers.  It  saves  time  and  expense,  to  say  noth- 
ing of  other  advantages,  to  put  it  in  the  centers  in  the 
first  place.  In  other  words,  in  carrying  out  this  provision 
of  the  law,  the  Secretary  of  the  Treasury  is  virtually  made 
the  judge  of  the  need  for  the  money  supply  in  different 
sections  of  the  country  as  based  upon  their  location,  their 
industrial  condition,  and  the  particular  trade  movements 
at  the  time.  This  is  a  tremendous  responsibility.  The 
law,  moreover,  subjects  him  to  great  political  and  sec- 
tional pressure  and  exposes  the  interests  of  the  country 
at  such  times  to  influences  that  can  be  only  injurious. 

264 


Independent   Treasury  of  the    United   States 

Indeed,  so  keenly  did  Secretary  Cortelyou  feel  the  diffi- 
culties, that  he  appointed  a  commission  in  April,  1907, 
to  consider  the  whole  matter  of  dealing  with  public  de- 
posits.«  In  commenting  on  the  matter  the  Secretary  tells 
us  that  the  policy  of  gradual  distribution  of  funds  to 
places  where  they  were  most  needed,  which  was  inaugurated 
in  the  spring  of  the  year  and  carried  through  the  summer, 
was  continued  by  the  banks  in  October.  He  adds:  "It 
then  became  necessary  to  mass  the  funds  in  large  amounts 
where  they  would  be  most  effective,  and  the  figures  of 
the  Government  show  that  from  the  financial  centers  they 
were  distributed  almost  automatically  to  the  points  most 
seriously  threatened."  This  remark  is  simply  saying  in 
another  way  that  all  that  is  necessary  in  making  govern- 
ment deposits  to  secure  the  most  effective  distribution  is 
to  put  them  in  the  banks  in  the  financial  centers. 

The  Secretary  also  attempted  to  "  broaden  the  basis  upon 
which  public  deposits  might  be  made"  by  adding  to  the 
list  of  acceptable  bonds  some  new  ones.  State,  railway, 
and  municipal  bonds,  within  the  provisions  of  the  savings 
banks  laws  of  Massachusetts  and  New  York  were  accepted 
as  security  at  90  per  cent  of  their  market  value.  These 
became  scarce  in  October,  and  the  Secretary  accepted 
bonds  which  came  within  the  laws  of  Connecticut  and 
New  Jersey.  In  addition,  he  accepted,  as  he  says,  a  few 
bonds  not  strictly  coming  in  either  of  these  classes,  but 
of  good  market  value.  Deposits  were  made  against  these 
to  75  per  cent  of  their  market  value.  Here,  again,  we 
have  a  discretion  which  opens  up  the  possibility  of  great 

o  See  p.  127. 
265 


National     Monetary     Commission 

danger  from  possible  pressure  on  the  Secretary  to  accept 
bonds  for  security.  It  should  be  added  that  when  the 
market  price  of  the  bonds  accepted  was  above  par  they 
were  accepted  for  only  90  per  cent  of  their  par  value. 

It  is  easier  to  deposit  public  money  in  the  banks  with- 
out causing  disturbance,  in  such  times  as  we  have 
described,  than  it  is  to  get  it  back  again  without  caus- 
ing further  disturbance.  The  only  method  whereby 
money  once  deposited  in  the  banks  can  be  recovered 
is  by  its  actual  transfer.  The  Treasury  may  not  check 
against  its  account  with  the  banks.  The  recall  of  public 
deposits  means,  therefore,  a  reduction  of  the  reserve 
and  a  possible  contraction  of  discounts.  The  Secretary, 
therefore,  must  exercise  considerable  caution  in  recall- 
ing his  deposits.  On  the  whole  the  Secretary  managed 
his  part  of  the  work  very  well.  Of  course  in  a  crisis 
monev  accumulates  in  the  banks,  discount  rates  fall,  and 
it  is  less  difficult  to  recall  deposits  than  it  otherwise 
would  be. 

The  manipulation  of  the  money  market  by  the  Treasury 
has  gone  so  far  that  the  Secretary  seems  obliged  now 
to  exercise  guardianship  over  the  money  market,  not 
onlv  in  times  of  crises,  but  at  other  times.  He  feels 
that  he  must  relieve  the  money  market  by  depositing 
the  public  money  in  the  banks  in  the  fall  to  meet  the 
autumnal  drain  from  the  interior,  and  taking  it  out  after 
that  drain  has  passed. 

All  these  are  matters  of  great  responsibility,  and  most 
of  the  Secretaries  in  the  past  twenty  years  have  felt  the 
responsibility  very  heavily.     Their  feeling  is  very  well 


266 


Independent   Treasury  of  the    United   States 

put  by  ex-Secretary  Cortelyou  in  a  report  to  the  Senate 
already  referred  to: 

"  In  every  measure  taken  the  Secretary  felt  that  he 
was  bound,  under  our  existing  fiscal  and  monetary  sys- 
tem, to  have  regard  not  simply  to  the  operations  of  the 
Treasury,  but  to  their  effect  upon  the  financial  condi- 
tion of  the  country.  The  present  head  of  the  department 
has  not  assumed  this  obligation  willingly  and  would 
be  glad  to  be  relieved  of  it  at  least  in  part  by  suitable 
legislation,  but  under  a  fiscal  and  monetary  system 
which  results  in  large  accumulations  of  actual  currency 
in  the  Treasury  at  times  when  it  may  be  most  needed  in 
the  markets,  and  which  affords  inadequate  means  of 
adapting  the  circulation  to  the  demands  of  business,  it 
would,  in  his  opinion,  be  a  narrow  view  of  his  functions 
which  should  limit  him  to  keeping  his  own  balance  sheet 
favorable,  while  ignoring  the  effect  of  Treasury  operations 
upon  the  condition  of  the  country.  If  recent  events 
should  lead  to  intelligent  legislation,  tending  to  adapt 
the  movement  of  currency  more  nearly  automatically 
to  the  requirements  of  business,  it  would  be  a  source  of 
gratification  to  the  Secretary  and  would  greatly  diminish 
the  sense  of  responsibility  which  must  weigh  heavily 
upon  any  occupant  of  the  office  under  conditions  such 
as  those  of  the  recent  crisis.""     These  are  wise  words. 

a  Response  of  the  Secretary  of  the  Treasury  calling  for  certain  infor- 
mation in  regard  to  Treasury  operations,  etc.,  S.  Doc.  208,  6oth  Cong., 
ist  sess.,  32. 


267 


Chapter   XI. — Conclusions   as  to  Treasury   Relief 

IN  Crises. 

general  conclusions. 

As  shown  by  the  history  of  the  periods  of  great  busi- 
ness disturbance  which  we  have  briefly  sketched,  the 
effects  of  the  utiHzation  of  the  independent  treasury  to 
afford  reHef  to  the  money  market,  evidently  depend  on 
the  character  of  the  crisis,  the  methods  of  relief  adopted, 
and  the  wisdom  shown  in  applying  it.  We  have  seen  the 
system  producing  stringency  when  "  ease  in  the  market 
was  needed  for  legitimate  business,  and  also  when  <» 
speculation  was  rife  and  had  its  course  checked  by  the 
subtreasury  absorptions.  We  have  seen  that  the  output 
of  money  to  relieve  a  distressed  market  may  result  in  pro- 
moting speculation,''  or  in  yielding  some  needed  help  to 
business  men,''  or  partly  or  altogether  neutraHzed  by 
hoarding  ''  from  lack  of  pubHc  confidence  in  the  immediate 
future  of  business.  This  variety  of  action  clearly  shows 
that  the  independent -treasury  system  does  not  have  such 
an  autom.atic  connection,  so  to  speak,  with  business,  as 
to  make  its  operation  responsive  to  the  exigencies  of  the 
mercantile  community.  So  far  as  the  history  we  have 
examined  shows,  the  independent  treasury  has  been  use- 
ful in  monetary  stringencies  and  crisis,  when  its  absorp- 
tions have  coincided  with  a  rise  of  prices  caused  by  specu- 
lation, because  it  then  retarded  speculation;  and  when  its 
disbursements  have  coincided  with  a  demand  for  money 

a  In  1857.    '>  In  1853,  1890,  and  1902.    c  in  1873,  1890,  and  1907. 

268 


Independent   Treasury  of  the    United   States 

for  a  legitimate  temporary  expansion  of  business  its  action 
has  been  beneficial.  When  it  has  disbursed  during  specu- 
lation, or  absorbed  during  a  healthy  business  expansion, 
it  has  done  mischief.  It  has  failed  altogether  when  credit 
was  suspended,  and  has  sometimes  made  the  situation 
worse  by  promoting  hoarding. 

Of  the  various  methods  mentioned  whereby  the  inde- 
pendent treasury  has  had,  or  may  have,  a  calming  influence 
on  a  troubled  market,  three  are  of  importance  at  present — 
namely,  the  restraining  influence  on  banks,  which  Secre- 
tary Guthrie  claimed  the  system  exercises  on  a  rising 
market  by  locking  up  money  opportunely;  the  redemp- 
tion of  the  public  debt,  including  the  purchase  of  bonds 
and  the  prepayment  of  interest ;  and  depositing  the  public 
money  in  the  banks.  The  first  of  these  processes  retards 
speculation,  and,  if  used  at  all,  should  be  applied  on  a 
rising  speculative  market.  The  other  two  methods  are 
measures  of  relief  when  the  stress  is  on. 

To  begin  with,  objection  is  sometimes  made  that  all 
government  interference  in  the  money  market  is  out  of 
place.  But  while  laissez-faire  as  a  doctrine  is  more  or  less 
discredited,  in  the  absence  of  any  better  principle,  govern- 
ment interference  must  justify  itself  in  each  new  field  it 
enters.  Experience,  both  in  England  and  in  this  country, 
has  shown  that  judicious  action  on  the  part  of  the  Govern- 
ment may  do  much  to  prevent  a  panic,  and  success  in  one 
instance  is  all  that  is  logically  necessary  to  establish  a  case 
for  future  interference  under  similar  conditions. 

The  danger  of  relying  on  the  Government  for  aid  in 
times  of  monetary  distress  lies  less  in  the  promotion  of 
speculation,  or  in  the  diminution  of  caution  in  the  usual 

269 


National     Monetary     Commission 

conduct  of  business,  than  in  the  possibility  that  the  action 
of  the  Government  will  be  pushed  by  public  clamor,  or 
by  pressure  from  banking  interests,  to  a  point  where  it 
may  be  more  injurious  than  inaction  would  have  been. 
That  this  danger  is  not  merely  fanciful  is  shown  by  the 
experience  of  1873  and  1890,  and,  perhaps,  1907.  In  the 
first  of  these  years  "great  pressure  was  brought  to  bear 
upon  the  Treasury  Department"  to  loan  its  notes  on  secured 
clearing-house  certificates  as  collateral,  or  to  use  the  money 
on  hand  in  the  purchase  of  exchange,  or  to  issue  notes  on 
the  deposit  of  gold  in  the  Bank  of  England,  or  to  pay  "  at 
once"  the  $20,000,000  loan  of  1858,  or  to  deposit  money 
at  designated  places  to  be  used  in  the  purchase  of  exchange 
on  New  York.  There  were  even  many  persons  "who 
insisted  with  great  earnestness  that  it  was  the  duty  of  the 
Executive  to  disregard  any  and  all  laws  which  stood  in  the 
way  of  affording  the  rehef  suggested  by  them."'^  In  1890 
some  people  demanded  the  use  of  the  $100,000,000  of  gold 
kept  for  redemption  of  the  greenbacks.  In  1893  and 
1907,  there  were  voices  heard  for  the  issue  of  more  gov- 
ernment paper. 

To  be  most  effective,  the  help  of  the  Government  must 
in  every  case  be  timely,  certain,  and  sufficient  completely 
to  remove  the  danger.  But  it  is  not  always  so.  In  the 
panic  of  1873  the  support  of  the  public  purse  was  tardy, 
timid,  and  insufficient.  The  Secretary  of  the  Treasury 
did  not  undertake  to  purchase  bonds  until  the  market 
had  reached  its  breaking  point,  and  the  panicky  feeling 
could  not  be  checked,  as  fully  at  least  as  it  might  have 

apinance  Report  for  1873.     Also  Upton's  "  Money  in  Politics,"  140. 


270 


Independent   Treasury  of  the    United   States 

been  by  earlier  action.  In  1907,  too,  after  the  surplus 
was  deposited  in  the  banks,  the  Treasury  could  afford 
no  more  relief. 

Of  course,  it  is  true  that  some  one  or  some  group  of 
men  must  use  their  judgment  to  determine  whether  at  a 
particular  time  stringency  in  the  money  market  should 
be  anticipated,  or  relief  should  be  furnished  when  the 
crisis  is  on.  While  no  candid  student  of  our  Treasury 
can  have  other  than  praise  for  the  good  judgment  which, 
on  the  whole,  has  been  shown  by  successive  secretaries  in 
their  relations  to  the  money  market,  nevertheless,  the 
Secretary  of  the  Treasury  is  not  the  proper  person  to 
determine  these  points.  He  is  not  in  immediate  touch 
with  business  matters.  He  must  get  his  information  of 
the  situation  largely  at  second  hand  from  bankers  and 
others.  He  is  likely  to  be  less  experienced  in  judging  of 
such  matters  than  men  whose  business  it  is  constantly  to 
watch  them  and  care  for  them. 

The  success  of  the  effort  of  the  Government  to  relieve 
a  panic  depends,  then,  largely  on  the  good  judgment  of 
the  officers  of  the  Government.  The  first  important 
method  of  relief  consists  in  what  Secretary  Guthrie  called 
"restraining  the  banks."  That  is,  the  subtreasury  locks 
up  government  receipts  from  circulation.  If  this  takes 
place  at  a  time  when  business  is  slack,  reserves  large,  and 
discount  rates  low,  it  will  very  likely  be  of  assistance 
to  the  banks  and  the  money  market.  As  we  have  seen, 
however,  the  fatal  defect  of  the  subtreasury  action  is 
that  there  is  no  correspondence  between  its  output  and 
intake  on  the  one  hand,  and  the  periods  of  stress  and  ease 
of  the  banks  on  the  other.     If  the  independent  treasury 

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National     Monetary     Commission 

were  by  its  nature  and  organization  a  suitable  means  of 
relief  it  should  be  available  in  every  crisis.  To  be  so 
its  accumulations  of  money  should  depend,  in  some  meas- 
ure, upon  the  conditions  which  make  money  dear.  But 
this  is  not  the  case.  It  accumulates  and  disburses  inde- 
pendently of  the  state  of  the  money  market.  While  it 
presses  the  banks,  to  use  an  old  term,  it  is  never  pressed 
by  them  in  turn.  That  is,  its  action  can  never  be 
restrained  by  them.  Its  vaults  may  not  be  full  when 
its  help  is  needed  most,  as  was  the  case  in  1873,  1890, 
and   1893. 

RELIEF    BY    BOND    PURCHASES. 

The  objections  to  the  relief  of  the  money  market  by 
the  purchase  of  bonds  are  these: 

1.  The  fact  that  the  timeliness  of  the  relief  thus  of- 
fered is  uncertain. 

2.  The  loss  due  to  the  purchase  of  the  bonds  at  a 
premium  before  they  are  due. 

3.  The  loss  due  to  the  curtailment  of  bank  circulation 
by  lessening  the  amount  of  the  bonds  available  for  se- 
curity of  note  issue. 

4.  The  loss  that  arises  from  forcing  up  the  market 
price. 

5.  The  possibility  of  cornering  the  treasury. 

The  purchase  of  bonds  for  the  relief  of  the  market 
depends,  like  the  depositing  of  public  money  in  banks, 
on  the  judgment  of  the  Secretary  of  the  Treasury.  If 
he  purchases  at  the  right  time  the  transaction  does 
good.  If  he  purchases  at  proper  prices  the  transaction 
may  do  good.  Aside  from  the  danger  of  untimeliness  of 
relief  in  purchase  of  bonds  from  bad  judgment  on  the 

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Independent   Treasury  of  the    United   States 

part  of  the  Secretary,  there  is  also  danger  that  the  money 
thus  disbursed  is  paid  out  on  too  easy  terms.  The  pur- 
chase of  bonds  at  the  market  rate,  or  the  full  repayment 
of  interest,  makes  the  money  too  easy  to  get.  Under 
such  terms  the  Treasury  would  need  an  amount  of  money 
large  enough  to  supply  not  only  those  who  were  in  real 
need  of  it,  and  ready  to  make  a  large  sacrifice  to  obtain 
it,  but  also  those  who  might  want  it,  not  for  immediate 
use,  but  for  hoarding.  To  obviate  this  difficulty  the 
bonds  should  be  purchased  at  a  sufficiently  large  dis- 
count from  the  market  value.  But  if,  on  the  other  hand, 
the  Secretary  of  the  Treasury  makes  the  money  hard  to 
get,  banks  which  need  money  and  try  to  obtain  it  by 
selling  public  securities  are  put  in  a  more  difficult  posi- 
tion, and  their  ability  to  aid  in  easing  the  stringency  is 
curtailed.  This  last  consideration  is  of  great  importance 
in  view  of  the  fact  that  the  direct  relief  afforded  by  gov- 
ernment disbursements  is  measured  by  the  money  paid 
out  of  the  Treasury,  whereas  the  same  money  deposited 
in  the  banks  would  enable  them  to  discount  to  two  or 
three  times  the  amount,  thus  affording  a  large  measure 
of  relief. 

Another  objection  that  might  be  urged  is  the  loss  to  the 
people  in  the  forced  purchase  of  bonds  at  a  high  premium. 
Secretary  Fairchild,  in  his  report  for  1888,  writes: 
"Ninety-four  millions  of  dollars  of  bonds  have  been 
secured  under  this  circular,  and  a  premium  paid  for  the 
privilege  of  buying  them  of  about  $18,000,000;  .  .  .  the 
saving  in  the  total  amount  of  interest  which  would  have 
been  paid  had  the  bonds  been  allowed  to  run  to  maturity, 
is  about  $27,000,000.  Had  taxation  been  reduced  so  as 
41969° — 10 18  273 


National     Monetary     Commission 

to  leave  this  money  with  the  people,  and  if  it  is  worth  in 
their  business  6  per  cent  per  annum,  the  total  value  of 
the  money  to  them  during  the  term  which  these  bonds 
had  to  run  would  be  about  $83,000,000;  thus,  there  is  a 
resulting  loss  to  the  people  of  $56,000,000  upon  this  trans- 
action alone."  This  is  not  strictly  accurate.  It  is  im- 
possible to  state  exactly  the  loss  to  the  people  on  such  a 
transaction;  first,  because  it  can  not  be  fairly  assumed 
that  the  money  left  with  the  people  would- all  "fructify" 
at  the  rate  of  6  per  cent;  and  secondly,  because  the 
amount  of  money  disbursed  by  the  Government  in  pur- 
chasing bonds  is,  it  may  be  reasonably  assumed,  largely 
restored  to  the  channels  of  business.  The  total  social 
loss,  then,  is  composed  of  two  elements — that  which  arises 
from  the  nonemployment  of  the  money  while  it  is  in  the 
government  vaults,  and  that  which  is  caused  by  the  fact 
that,  while  the  money  is  indeed  returned  to  business  by 
the  government  payments,  it  is  likely  to  reach  persons 
other  than  those  from  whom  it  was  taken  by  taxation. 
Such  a  transfer  will  involve  a  social  loss,  especially  if 
those  to  whom  the  money  is  paid  do  not  employ  it  so 
productively  as  those  from  whom  it  was  taken  by  taxa- 
tion. One  of  Secretary  Windom's  transactions  in  1890 
w^ill  serve  as  an  illustration.  Under  the  circular  of  Sep- 
tember 13  of  that  year,  $17,071,150  of  4  per  cent  bonds 
were  redeemed  at  a  cost  of  $21,617,673.77,  which  repre- 
sents a  premium  of  26.6  per  cent.  The  reduction  of  in- 
terest charge  from  the  transaction  was  $682,846  per  an- 
num. The  bonds  were  due  in  1907,  and  had,  therefore, 
about  seventeen  years  to  run.  The  amount  of  the  pre- 
mium paid  was  $4,546,523.77.     If  the  $21,617,673  had 

274 


Independent   Treasury  of  the    United   States 

been  kept  by  the  Government,  and  put  out  at  interest  at 
4  per  cent,  compounded  annually,  for  seventeen  years,  and 
the  amount  of  the  interest,  $682,846,  is  paid  every  year 
from  the  proceeds,  the  amount  which  the  Government 
would  have  at  the  end  of  the  seventeen  years  for  the  pay- 
ment of  the  principal  would  be  $25,927,322.  This  would 
leave  a  surplus  of  $8,856,172,  the  present  value  of  which 
would  be  the  loss  to  the  Government.  That  value  is,  of 
course,  the  premium  actually  paid. 

But  it  is  hardly  fair  to  assume  that  the  Government 
would,  or  should,  invest  in  this  way.  Another  way  to 
look  at  the  matter  is  this:  If  the  Government  waited 
until  the  bonds  were  due,  it  would  in  the  meantime  pay 
$682,846  each  year  as  interest;  and  at  the  end  of  the 
seventeen  years  it  would  pay  the  par  value  of  the  bonds. 
But  in  the  meantime  it  would  have  the  use  of  $682,846 
for  seventeen  years,  sixteen  years,  and  so  on,  down  to 
one  year.  The  gain  or  loss  will  be  the  difference  between 
the  amount  paid  and  the  present  worth  of  a  seventeen 
years'  annuity  of  $682,846,  at  4  per  cent,  plus  the  present 
worth  of  the  par  value  of  the  bonds.  From  this  stand- 
point, also,  the  loss  was  the  amount  of  the  premium.  It 
must  be  borne  in  mind  that  no  one  of  these  amounts 
represents  the  social  loss  or  the  loss  to  the  nation  as  a 
social  unit.  The  loss  spoken  of  is  the  loss  which  the  Gov- 
ernment, or  the  whole  people  as  a  debtor,  sustains  to  part 
of  the  people  as  creditor. '^  Moreover,  all  such  computa- 
tions are,  at  best,  only  guesses. 

oThe  transaction  mentioned  was  equivalent  to  buying  bonds  at  par, 
at  about  2.1  per  cent;  evidently  since  the  Government  could  not  have 
floated  a  new  issue  of  bonds  at  so  low  a  rate  as  that,  there  must  have 
been  a  loss  on  the  purchase  actually  made. 

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National     Monetary    Commission 

The  direct  loss  from  the  forced  purchase  of  bonds  at  a 
premium  is  not  the  only  one  to  be  considered.  The  pur- 
chase may  do  harm  in  addition  by  curtailing  bank 
circulation.  "It  is  difficult  to  estimate  the  full  effect 
of  bond  purchases  by  the  Secretary  of  the  Treasury 
upon  the  volume  of  circulation  of  the  national  banks, 
for  while  $24,117,400  of  bonds  were  withdrawn  and 
directly  transferred  for  purchase,  about  $8,000,000  being 
substituted,  the  total  withdrawals  amounted  to  more 
than  $40,000,000;  but  undoubtedly  the  larger  part  of 
the  $16,000,000  not  withdrawn  for  transfer  were  either 
placed  on  the  market  or  were  purchased  by  the  Secretary 
directly  from  the  banks  after  withdrawal. "«  If  the 
purchase  of  bonds  forces  the  price  up,  it  may  be  more 
profitable  for  the  banks  to  sell  bonds,  contract  their 
issues,  and  take  advantage  of  prevailing  high  rates  of 
discounts  to  enlarge  their  loans. 

That  the  Treasury  purchases  of  bonds  may  force  their 
price  up  there  is  no  doubt.  Speaking  of  a  Treasury  offer 
to  purchase  bonds,  in  1887,  the  Financial  Chronicle^  said: 
"Early  in  the  week  when  it  was  represented  that  there 
would  be  no  change  in  the  Treasury  policy  prices  sharply 
declined,  and  at  times  the  market  verged  close  on  a  panic. 
On  Wednesday,  after  it  was  known  that  the  offerings  of 
/if%  percents  to  the  Government  had  been  very  small,  a 
recovery  took  place.  This  may  seem  paradoxical,  but  the 
theory  was  that  it  would  lead  the  Government  to  extend 
the  offer  to  purchase  bonds  so  as  to  include  the  4  percents. 
As  this  proved  to  be  the  case   the  very  next  day,  the 

a  Kept.  Comptroller  of  the  Currency,  1890,  Cf.  Ibid.,  1888,  p.  453. 
6  September  24,  1887. 

276 


Independent   Treasury  of  the   United   States 

market  further  advanced,  and  it  has  been  quite  strong 
since." 

"An  illustration  of  almost  weekly  occurrence,  during 
several  years  when  the  Government  was  rapidly  reducing 
its  indebtedness,  will  serve  to  show  the  effect  of  an  infla- 
tion of  the  currency..  On  certain  days  each  week,  about 
12  o'clock,  messengers  from  many  establishments  in  Wall 
street  were  waiting  at  the  subtreasury.  An  official 
brought  out  and  posted  a  written  notice,  announcing  that 
the  Government  would  redeem  on  a  certain  date  bonds 
amounting  to  $10,000,000.  *  *  *  Within  five  minutes 
orders  began  to  pour  into  the  exchange  for  the  purchase 
of  stocks.  At  the  same  time  those  who  had  stocks  to  sell 
were  warned  by  their  messengers  to  hold  them  at  high 
prices.     A  sudden  upward  rush  in  prices  occurred."'* 

But  even  this  is  not  the  whole  case.  Under  cover  of 
the  excitement  of  a  panic,  influences  may  be  set  at  work 
to  "corner  the  Treasury"  and  compel  the  Secretary  to 
purchase  bonds;  that  is,  public  excitement,  worked  up 
for  the  purpose,  may  exercise  a  coercive  power.  This  was 
undoubtedly  one  element  in  the  crisis  of  1890.  Under 
cover  of  the  panic  a  combination  of  speculators,  "'short' 
of  the  stock  market  and  'long'  of  government  bonds," 
operated  to  force  down  railroad  shares  and  force  up  gov- 
ernment bonds.  Of  course  the  purpose  was  that  the 
"shorts"  might  "cover"  at  a  profit,  and  that  the  others, 
in  the  apprehension  created,  might  compel  the  Secretary 
of  the  Treasury  to  relieve  the  market  and  enable  them  to 
sell  their  bonds.  That  there  was  some  such  combination 
seems  probable  from  the  fact  that,  although  the  Treasury 

«  Grosvenor,  Wm.  M.,  American  Securities,  220. 
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National     M on  et ar y     Commission 

purchased  heavily  up  to  the  17th  of  September,  the  bulk 
of  the  money  went  outside  of  New  York,  but  that  all 
paid  out  on  that  day — on  the  consummation  of  the  plan — 
remained  in  the  city." 

RELIEF    BY   DEPOSITS   IN   BANKS. 

The  other  important  method  now  available  for  antici- 
pating a  stringency  in  the  market,  or  furnishing  a  relief 
when  the  stringency  has  come,  is  to  transfer  the  public 
money  from  the  Treasury  to  the  banks.  By  depositing 
is  here  meant,  however,  not  the  continuous,  regular,  deposit 
of  government  funds,  but  the  occasional  transfer  of  them 
to  the  banks  from  the  subtreasuries,  in  order  to  strengthen 
the  banks  or  relieve  them  in  distress.  It  is  deposit  for 
the  purpose  of  relief,  therefore,  that  we  are  considering. 

The  objections  which  have  been  made  to  the  method 
of  relieving  the  money  market  by  the  purchase  of  bonds, 
apply  in  the  main  to  the  method  of  relief  through  bank 
deposits.  The  whole  process  depends,  of  course,  upon 
the  existence  of  a  surplus  and,  like  premature  debt  pay- 
ment, is  involved  with  the  policy  of  surplus  financiering. 
If  there  is  not  a  constant  surplus  the  opportunity  to  give 
relief  will  be  purely  accidental.  The  advantage,  if  any, 
which  comes,  must  depend  upon  the  good  judgment  of 
the  Secretary.  If  he  anticipates  a  stringency  he  must 
show  good  judgment  in  the  timeliness  of  his  deposits. 
If  his  action  is  too  early  it  will  promote  speculation.  If 
it  is  too  late  he  will  fail  to  accomplish  the  good  he  aims  at. 

However,  if  the  Treasury  is  to  be  looked  to  as  the 
proper  source  of  relief  in  crises,  the  deposit  of  its  receipts 

o  See  Bankers'  Magazine,  October,  1890. 
278 


Independent   Treasury  of  the    United   States 

in  the  banks  is  the  best  method  of  accompHshing  the  pur- 
pose; but,  under  our  system  of  banking,  the  present 
practice  concerning  deposits  is  open  to  some  serious 
objections.  We  have  a  system  of  scattered  banks  whose 
interests  are  hkely  to  clash  in  times  of  difficuhy.  There 
is  some  truth  in  the  statement  that  has  been  often  made 
that  in  a  crisis  the  banks  of  the  country  are  Hkely  to  seek 
their  respective  individual  interests  instead  of  uniting 
their  forces  to  overcome  the  difficulty.  Of  course  this 
statement  is  made  with  due  regard  to  the  cooperation  of 
the  clearing-house  banks  in  all  money  centers.  There 
certainly  is  lack  of  unity  of  purpose  and  action,  and 
therefore  a  certain  waste  or  lack  of  full  utilization  of 
power  in  time  of  distress.  This  is  a  consequence  of  our 
system  of  independent  banking. 

To  be  most  effective  in  affording  relief  to  the  strained 
market  government  deposits  should  be  placed  in  the 
banks  of  the  principal  money  centers,  or  possibly  in  the 
principal  money  center.  The  provision  of  the  present 
law  requiring  an  equitable  distribution  is  vicious.  It  is 
true,  to  be  sure,  that  the  law  is  so  worded  that  the  Secre- 
tary has  large  discretion,  but  he  should  not  be  limited  by 
any  such  condition.  In  times  of  stress  the  best  place  for 
the  money  to  be  deposited,  as  has  just  been  remarked,  is 
in  the  money  centers.  It  is  needed  most  there.  It  is  in 
these  places  that  the  credit  pyramid  has  been  built  high- 
est. It  is  in  these  in  which  credit  payments  fall  off  more 
and  money  is  more  in  demand  for  settlement  when  a 
crisis  comes.  In  these  places  the  deposits  should  be  put 
both  to  enlarge  reserves  and  to  furnish  the  supply  of 
money  needed  for  the  uimsual  cash  settlement.     If  ease 

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National     M on  et ar y     Commission 

is  established  in  these  centers,  other  places  are  not  likely 
to  suffer. 

If  the  deposits  of  public  money  are  to  be  relied  on  as 
a  source  of  relief  in  times  of  trouble,  they  should  not  be 
made  at  other  times.  That  is  to  say,  reliance  upon  the 
Treasury  for  relief  through  the  deposit  of  public  money 
in  crises  is  unavailable  if  the  Treasury  deposits  its  receipts 
currently  with  the  banks,  for  obviously  there  will  be  no 
surplus  in  the  Treasury  to  deposit  when  trouble  comes. 
This  happened  in  1907.  The  surplus  was  all  deposited 
in  the  banks.  The  Treasury  could  do  nothing  more  either 
in  the  way  of  enlarging  its  deposits  or  of  enlarging  the 
circulation  by  bond  purchases.  Hence  the  Secretary 
resorted  to  the  extraordinary  plan  of  selling  bonds,  with 
the  expectation,  apparently,  that  hoarded  money  would 
be  drawn  out,  or  that  the  banks  would  buy  them  as  a 
basis  of  new  circulation. 

From  the  foregoing  considerations  it  appears  that  the 
use  of  the  independent  treasury  for  affording  relief  in  a 
panic  by  means  of  the  money  accumulated  in  the  course 
of  its  operations  is  not  a  satisfactory  mode  of  accomplishing 
that  purpose.  Its  aid  is  arbitrary  in  method,  very  likely 
to  be  misdirected,  generally  insufficient  as  rendered,  and 
actually  promotive  of  injury  by  stimulating  speculation 
and  by  making  it  more  difficult  for  the  banks  to  replenish 
and  keep  intact  their  reserves.  Even  when  it  is  helpful, 
the  aid  which  the  independent  treasury  can  render  is 
measured  by  the  amount  of  its  disbursements,  and  the 
maximum  effect  of  this  aid  must  be  lessened  by  the  easy 
conditions  under  which  it  is  offered;  or  else,  if  these 
conditions  are  made  harder,  the    aid  which    the    banks 

280 


Independent   Treasury  of  the    United   States 

could  otherwise  render  is  diminished  and  counteracts  to 
a  certain  extent  the  good  effect  of  the  Treasury  opera- 
tions. Moreover,  the  good  done  by  the  subtreasury 
expansions  is  less  in  a  delicate  condition  of  the  market 
than  the  evil  done  by  its  contractions,  for  contraction 
of  the  currency  then  is  quicker  to  produce  distrust  than 
expansion  is  to  restore  confidence. 

IvIMITATIONS   OF   SUBTREASURY   REUEF   IN    CRISES, 

The  limitations  of  the  usefulness  of  the  independent 
treasury  for  the  relief  of  business  when  distressed  are,  then, 
very  great.  The  helpfulness  of  an  expansion  of  the  cur- 
rency in  calming  the  disturbance,  whether  by  the  Treasury 
or  by  banks,  will  depend  in  part  on  the  nature  of  the  crisis 
and  its  degree  of  severity.  The  independent  treasury  has 
all  the  limitations  of  banks  in  an  attempt  to  relieve  a 
crisis,  besides  many  of  its  own,  for  even  the  banks  are 
limited  in  such  cases  by  the  fact  that  under  certain  circum- 
stances something  more  than  an  expansion  of  the  currency 
is  needed  to  give  relief.  A  short  examination  of  the  charac- 
ter of  crises  will  bring  out  more  clearly  the  limitations  com- 
mon to  both  the  banks  and  the  independent  treasury. 

If  the  disturbance  is  due  simply  to  a  lack  of  money, 
while  business  is  in  an  otherwise  healthy  condition,  an 
expansion  of  the  currency,  whether  by  an  increase  of  bank 
discounts  or  notes  or  by  an  outpour  of  a  Treasury  surplus, 
will  relieve  the  crisis  and  prevent  a  panic.  But  if  the  ex- 
pansion is  due  to  the  independent  treasury,  this  result  will 
be  attained,  as  we  have  seen,  with  more  or  less  success, 
according  to  the  skill  of  the  Secretary  of  the  Treasury. 
Even  if  a  crisis  becomes  a  panic,  and  is  accompanied  by 

281 


National     Monetary     Commission 

a  complete  breakdown  of  the  circulating  medium,  as  in 
1857,  an  independent  treasury  could,  under  certain  con- 
ditions, do  much  to  ease  the  situation. 

If,  however,  the  crisis  is  an  industrial  one,  an  expansion 
of  the  currency,  whatever  its  source,  can  be  of  little  avail. 
A  difficulty  of  this  kind  is  due  to  a  falling  off  of  demand  for 
goods  in  som.e  line,  or  lines,  of  production.  This  lessening 
of  demand  may  be  caused  either  by  some  change  of  custom 
or  mode  of  life,  or  by  cheaper  production  elsewhere,  or  by 
the  too  rapid  transmutation  of  circulating  capital  into 
fixed  capital.  In  this  case  the  difficulty  is  likely  to  be 
lasting,  and  any  increase  of  the  amount  of  money  afloat 
can  have  but  little  effect  unless  it  is  great  enough  and  pro- 
longed enough  to  enable  debtors  to  "hold  on"  until  the 
new  fixed  capital  begins  to  make  a  return  on  the  invest- 
ment. But  this  is  usually  a  matter  of  many  months,  or 
even  years,  and  is  too  long  a  period  to  be  influenced  by 
temporary  inflations  or  contractions  of  the  currency. 
Hence,  even  if  there  had  been  money  enough  in  the  Treas- 
ury to  satisfy  all  demands  for  it  in  that  fatal  third  week  of 
September,  1873,  for  example,  the  crash  would  not  have 
been  avoided,  but  only  postponed.  It  might  not  have 
been  so  great,  for  many  of  the  enterprises  that  had  been 
undertaken  proved  sound  ultimately;  but  many  others 
were  incapable  of  repaying  the  outlay  on  them,  at  least 
for  a  long  time,  and  some  not  at  all.  These  had  to 
collapse. 

The  immediate  cause  of  the  culmination  of  an  industrial 
crisis  into  a  panic  is  loss  of  confidence.  This  is  also  the 
ultimate  cause  of  commercial  panics,  and  may  be  due  to 
some  slight  accident  that  throws  suspicion  on  firms  pre- 

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Independent   Treasury  of  the    United   States 

viously  supposed  to  be  perfectly  "sound,"  or  to  a  wise 
conclusion  on  the  part  of  traders  that  speculation  has  gone 
too  far.  Whatever  its  cause,  a  breakdown  of  confidence 
puts  a  crisis  beyond  the  influence  of  Treasury  disburse- 
ments, as  we  saw  was  the  case  in  1873.  What  is  needed  at 
such  a  time  is  a  restoration  of  confidence,  and  confidence 
can  be  restored  only  by  a  period  of  quiet.  Time  must  be 
allowed  for  the  events  of  the  crisis  to  pass  from  men's 
minds.  "The  track  must  be  cleared  of  the  wreck.  The 
places  left  vacant  by  the  casualties  of  the  great  crash  must 
be  filled  by  new  men."  The  sting  of  failure  must  cease  to 
be  felt,  the  memory  of  dishonored  credit  must  be  allowed 
to  grow  dim,  new  grounds  of  confidence  must  be  seen, 
sound  conditions  of  business  must  be  reestablished.  With 
all  of  this  the  temporary  absorptions  and  disbursements 
of  money  by  the  Treasury  have  nothing  directly  to  do. 
There  can  be  no  restoration  of  business  and  no  rehabili- 
tation of  prices  until  credit  is  restored.  For  prices  are 
affected  by  the  variations  in  the  compound  purchasing 
medium  of  credit  and  money,  and  credit  is  relatively  the 
more  important  of  the  two."  Indeed,  at  such  times  money 
may  be  plentiful,  as  indicated  by  the  prevailing  rates  of 
discount.  But  "cheap  money  does  not  necessarily  mean 
active  speculation  and  high  prices.  We  have  had  our 
lowest  prices  and  most  stagnant  markets  when  bank  vaults 
were  phenomenally  overloaded."''  A  further  outpour  of 
money  would  therefore  prove  useless.  And,  indeed,  it  is 
extremely  doubtful  whether  it  is  wise,  in  a  so-called  capi- 

«  Cf.  Taussig's  "The  Silver  Situation."     Publ    Amer.  Econ.  Assoc,  vii; 
i:  63. 
6  E.  B.  Andrew's  "An  Honest  Dollar."     Ibid.,  iv  :  6  :  8. 

283 


National     Monetary     Commission 

tal''  panic,  to  try  to  devise  means  whereby  all  the  enter- 
prises endangered  by  shaken  credit  may  be  reserved. 
Many  of  them  are  of  such  a  character  that  the  interests  of 
society  will  be  better  served  by  their  destruction.  The 
difficulty  is  that  their  undertakers  usually  involve  others 
in  their  downfall,  and  the  saving  of  these  others  is  a  legiti- 
mate and  desirable  object,  even  although  its  accomplish- 
ment involves  some  support  of  the  unsound. 

Finally,  the  questions  must  be  considered  whether  the 
independent  treasury  may  not  have  an  influence  in 
creating  stringencies  which  it  afterwards  undertakes  to 
relieve,  and  at  what  period  of  a  crisis  its  help  is  most 
efficacious.  As  we  have  already  seen,  ^  Secretary  Guthrie 
praised  the  independent  treasury  in  1856,  on  the  ground 
that  it  exercises  a  restrictive  influence  on  the  banks  when 
"overtrading"  takes  place,  and  so  preserves  "the  general 
prosperity." 

As  the  rise  in  prices  under  such  circumstances  is  sup- 
posed to  be  due  wholly  or  mainly  to  speculation,  evi- 
dently any  influence  that  opposes  the  speculative  spirit 
will  retard,  perhaps  stop,  the  rise  of  prices,  and  may 
prevent  their  reaching  a  point  of  danger.  The  retarding 
influence  usually  operative  in  such  cases  is  the  export  of 
the  metals;  but  any  cause  tending  to  contract  the  cur- 
rency will  have  a  similarly  beneficial  effect.  The  absorp- 
tion of  money  by  the  independent  treasury  is  such  a 
cause,  and  may,  therefore,  be  regarded  as  herein  bene- 
ficial. It  not  only  diminishes  the  amount  of  money,  but, 
as  it  draws  mostly  from  the  banks,  it  at  the  same  time 

a  A  too  rapid  transmutation  of  circulating  to  fixed  capital. 
b  See  p.  70. 

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Independent   Treasury  of  the    United   States 

diminishes  their  power  to  lend.  Hence  it  may  exercise  a 
powerful  restraining  influence  on  speculation,  because  it 
will  arrest  speculative  extensions  of  credit  at  an  earlier 
stage,  with  a  less  drain  of  gold.  As  the  amount  of  their 
own  notes  which  banks  have  to  loan  is  limited,  deposits 
are  their  chief  means  of  discount.  Hence  the  rate  of 
interest  must  rise  immediately  when  the  demand  for  loans 
drives  the  reserve  below  a  certain  proportion,  loans 
become  more  difficult  to  get,  and  speculation  is  checked. 
This  process  is  made  to  begin  earlier  if  the  Treasury  is 
absorbing  money  at  the  same  time.  Its  restriction  of 
the  banks  under  these  circumstances  "is  a  real  impedi- 
ment to  their  making  those  advances  which  arrest  the 
tide  at  its  turn  and  make  it  rush  like  a  torrent  after- 
wards." The  independent  treasury  can  exert  such  an 
influence,  however,  only  when  its  absorption  of  money 
coincides  with  this  stage  of  the  stringency.  A  kind  of 
guaranty  that  such  coincidence  will  occur  is  found  in  the 
fact  that,  under  the  circumstances  described,  the  export 
of  the  metals  generally  implies  import  of  commodities 
and  consequent  payment  of  custom  dues.  But  such 
coincidence  can  be  regarded  as  certain  only  when  the 
speculation  affects  commodities  which  are  imported  sub- 
ject to  duty.  Under  our  inclusive  tariff  system  such 
articles  will  generally  be  thus  affected,  however;  and  we 
may,  therefore,  regard  the  effect  of  our  independent 
treasury  as  usually  beneficial  in  this  phase  of  the  inflation 
of  prices.  ^ 

There  are  still  other  sets  of  conditions  in  a  speculative 
market.     Exchange   may   be   in   favor  of   this   country, 


285 


National     Monetary     Commission 

prices  may  be  rising,  and  yet  there  may  be  a  drain  of  gold. 
This  was  the  case  in  1890.  Under  such  circumstances,  in 
so  far  as  the  gold  we  lose  belongs  to  foreign  creditors,  no 
action  we  can  take  will  prevent  our  losing  it  if  its  owners 
are  in  great  need,  as  seems  to  have  been  the  case  at  the  time 
mentioned.  Its  loss,  of  course,  may  injure  us  by  con- 
tracting the  currency,  and  obviously  any  further  contrac- 
tion by  the  locking  up  of  money  in  the  Treasury  vaults 
must  then  be  an  additional  injury.  But  if  the  gold  is 
going  abroad,  attracted  by  higher  rates  of  interest,  as 
when  the  Bank  of  England  by  arbitrarily  raising  its  rate 
of  discount  tends  to  raise  the  rate  generally  in  the  King- 
dom, then  the  Treasury  action  will  tend  to  keep  the  gold 
here,  by  making  it  temporarily  scarcer.  The  export  will 
not  stop  until  the  scarcity  of  money  here  raises  the  rate 
of  discount  to  a  point  where  the  home  rate,  plus  cost  of 
carriage,  will  be  about  equal  to  the  foreign  rate.  But 
nothing  is  gained  by  this.  Money  becomes  scarcer  just 
the  same.  What  we  would  have  lost  by  export  is  locked 
up  by  the  Government. 

When,  however,  speculation  has  attained  its  culmination, 
when  the  point  of  danger  is  reached,  and  a  collapse  of 
prices  is  threatened,  the  situation  is  different.  The  need 
is  for  free  discounting  at  high  rates;  but  the  amount  of 
loans  that  the  banks  can  give  is  limited,  because  a  large 
amount  of  money  that  would  otherwise  be  at  their  dis- 
posal is  locked  in  the  vaults  of  the  Treasury.  Now  the 
influence  of  the  system  is  evil.  The  evil  is  lessened, 
indeed,  if  the  money  is  at  once  disbursed;  but,  as  already 
pointed  out,  the  money  usually  comes  out,  if  it  comes  at 


286 


Independent   Treasury  of  the    United   States 

all,  under  conditions  that  lessen  its  usefulness  in  calming 
a  panic  or  relieving  a  stringency. 

If,  however,  the  monetary  stress  is  caused  not  by  an 
advance  of  prices  under  the  stimulus  of  speculation,  but 
by  some  cause  withdrawing  capital  from  the  market,  the 
whole  case  is  different.  Such  are  times  when,  for  example, 
heavy  foreign  payments  have  to  be  made,  or  when  there 
is  a  rapid  transmutation  of  circulating  into  fixed  capital. 
Such  drafts  are  met  either  by  the  withdrawal  of  deposits 
from  the  banks  or  by  the  sale  of  property  as  securities, 
or  by  the  contraction  of  loans.  In  any  case  the  source  of 
loans  is  curtailed,  the  rate  of  discount  rises,  loans  are  made 
only  on  prime  security,  and  shaky  houses  go  down, 
probably  involving  in  their  ruin  some  that  are  virtually 
solvent.  The  cause  of  the  evil  in  this  series  of  phenomena 
is  the  reduction  of  loanable  funds.  Any  influence  con- 
tributing to  that  reduction  intensifies  the  evil.  The 
locking  up  of  money  in  the  vaults  of  the  independent 
treasury  is  such  an  influence,  and  that  action  is  therefore 
bad.  The  results  will  come  about  if  the  absorption  by  the 
independent  treasury  coincides  with  the  withdrawal  of 
money  from  the  market  for  any  of  the  purposes  indicated. 
When  the  money  comes  out  of  the  Treasury  again,  if  the 
need  still  exists  for  drafting  it  for  any  of  the  objects  men- 
tioned, the  disbursement  will  be  good,  unless  it  is  made  in 
a  way  to  encourage  hoarding.  If,  however,  the  disburse- 
ment is  delayed  until  the  market  has  turned  and  prices 
have  adjusted  themselves  to  a  lower  level,  it  can  do  little 
or  no  good. 


287 


National     Monetary     Commission 

It  is  very  obvious,  however,  that,  so  far  as  monetary 
stringencies  and  crises  are  caused  by  excessive  stock  spec- 
ulation or  intensified  thereby,  any  efforts  made  by  the 
Treasurer  to  reheve  the  tension  of  the  money  market 
simply  condone  this  speculation,  if  indeed  they  do  not 
encourage  its  continuance  and  increase.  This  effect  can 
be  traced  in  several  instances  in  our  history.  For  instance, 
in  1 90 1  occurred  the  agitation  contingent  upon  the  North- 
em  Pacific  corner.  It  was  a  time  of  great  industrial  and 
financial  speculation.  This  and  the  following  year,  1902, 
will  be  remembered  as  a  time  of  general  prolonged  strin- 
gency, which  became  more  acute  toward  the  end  of  the 
year.  "  It  was  essentially  an  artificial  situation.  *  *  * 
Approximately  there  was  locked  up  in  connection  with 
syndicate  operations  not  less  than  $400,000,000,  while 
during  the  upward  march  of  securities  and  prices  an  enor- 
mous amount  of  borrowing  occurred  in  speculative  opera- 
tions. At  the  time  there  appeared  the  customary  with- 
drawal of  funds  by  western  and  southern  banks.  *  *  * 
The  drain  on  New  York  was  also  larger  in  connection  with 
industrial  functions.  *  *  *  Borrowing  abroad  was 
also  indulged  in  to  excess.  Owing  to  Wall  street  operations 
associated  banks  were  put  into  a  bad  position,  loans  rising 
well  above  deposits  and  surplus  reserves  falling  to  an 
uncomfortably  low  point.  Call  money  reached  its  highest 
point  at  35  per  cent,  just  half  the  top  record  of  1901 ;  but 
instead  of  being  caused  by  a  temporary  panic  in  the  street 
there  was  a  more  lasting  financial  stringency  that  threat- 
ened to  produce  disaster  in  the  stock  market,  making  tight 
money  the  cause  rather  than  the  effect.     An  abnormal 


288 


Independent   Treasury   of  the    United   States 

situation  such  as  that  called  for  heroic  measures  or  a  dis- 
astrous panic  would  have  resulted.  Secretary  Shaw  was 
equal  to  the  occasion,  however,  and  suggested  two  meas- 
ures that  were  so  unique  as  to  arouse  some  criticism.  The 
most  radical  was  the  acceptance  of  other  than  government 
bonds  as  security  for  public  deposits.  *  h:  *  it  was 
also  provided  that  the  associated  banks  were  not  required 
to  hold  a  reserve  against  public  deposits.  *  *  *  The 
former  proposition  was  *  *  h<  criticised.  *  *  *  it 
established  a  precedent  for  some  less  conservative  officer. 
The  stock  market  avoided  a  severe  panic."" 

The  above  facts  recited  by  a  leading  financial  journal 
show  by  another  instance  that  it  is  possible  for  stock 
speculators  to  force  up  the  market,  relying  on  the  Treasury 
disbursements  when  the  pinch  comes.  Therefore, 
Treasury  regulation  of  the  money  market  may  promote 
speculation  and  profit  speculators.  There  is  little  reason 
to  doubt  that  public  deposits  in  the  banks  have  been  made 
at  times  the  basis  of  a  speculative  fever.  When  the 
stringency  became  acute,  the  Treasury  was  looked  to  to 
save  the  situation  on  the  ground  of  the  public  interest. 

The  substance  of  this  analysis,  then,  is  that,  so  far  as 
crises  are  concerned,  the  independent  treasury  exercises 
a  beneficial  influence  only  in  the  early  stages  of  a  crisis 
caused  by  a  speculative  advance  of  prices;  that  in  the 
later  stages  of  such  an  occurrence  its  influence  is  evil  to 
a  greater  or  less  degree,  according  as  its  receipts  happen 
to  exceed  or  to  be  less  than  its  disbursements;  that  in  a 
stringency  caused  by  a  rapid  but  healthy  increase  of  busi- 


'^  Dun's  Review,  1903,  2:11 
41969° — 10 19  289 


National     Monetary     Commission 

ness  its  absorptive  influence  is  wholly  bad,  but  that  in 
the  later  stage  of  such  a  crisis  its  disbursements  are  pro- 
motive of  good,  unless  mismanaged  or  too  long  delayed. 
Hence  we  see  that  the  coincidence  of  a  particular  phase, 
or  stage,  of  the  progress  of  a  crisis  is  necessary  in  order 
that  the  influence  of  the  subtreasury  may  be  beneficial. 
But  such  a  coincidence  is  purely  fortuitous,  and  this  fact 
deprives  the  system  of  all  value  as  a  scientific  mode  of 
relief  in  crises. 


290 


Chapter    XII. — The    Independent    Treasury    as    a 
Fiscal  Agent. 

in  the  mexican  war. 

Thus  far  we  have  examined  the  effects  of  the  independ- 
ence of  the  treasury  system  in  its  relation  to  business 
in  ordinary  times  and  in  crises.  It  remains  to  inquire 
into  the  advantages  of  its  independence  when  the  Gov- 
ernment finds  it  necessary  to  negotiate  loans,  especially 
in  a  time  of  war. 

The  Mexican  war,  the  civil  war,  and  the  war  with 
Spain  have  occurred  since  the  adoption  of  the  independ- 
ent treasury  system.  The  financing  of  the  first  of  these 
was  comparatively  easy  and  the  necessary  fiscal  machinery 
correspondingly  simple.  The  country  was  prosperous, 
the  finances  in  good  condition,  and  the  war  was  short. 
In  this  war,  therefore,  the  sub  treasury  system  appeared 
to  advantage.  A  net  indebtedness  of  $49,000,000  was 
created,  all  the  loans  being  placed  at  par  or  above.  The 
subscriptions  for  one  of  the  loans  amounted  to  more  than 
three  times  the  amount  asked  for,  and  were  paid  in  specie. 
Nevertheless  some  difficulty  was  experienced.  In  Octo- 
ber, 1846,  Secretary  Walker  advertised  for  the  exchange 
of  $3,000,000  of  treasury  notes  at  par  for  specie,  but 
got  only  a  few  responses.  Concerning  the  operations  the 
Secretary  wrote: '^  "On  the  226.  October,  1846,  the 
department  advertised  for  the  exchange  of  $3,000,000  of 
treasury  notes  at  par  for   deposits  of  specie   with   the 

«  H.  Ex.  Doc,  ,soth  Colli;.,  ist  sess.,  6  :  17. 
291 


National     Monetary     Commission 

assistant  treasurers.  For  a  considerable  time  but  very 
few  of  such  deposits  were  made,  or  treasury  notes  thus 
taken;  and  from  this  long  delay  and  continued  reluc- 
tance upon  the  part  of  the  community  in  taking  these 
treasury  notes  at  par,  although  at  any  time  after  the 
28th  of  January  last  they  were  convertible  into  the  twenty- 
year  6  per  cent  stock  at  par,  many  of  the  notes  heretofore 
offered  at  par  not  having  been  taken  at  the  date  of  my 
advertisement  of  the  9th  of  February  last,  serious  doubts 
were  entertained  whether  the  whole  of  the  new  loan 
could  be  taken  at  or  above  par.  It  had  been  usual  here- 
tofore with  my  predecessors,  in  advertising  for  loans,  to 
emit  no  sum  to  any  individual  under  $25,000;  but,  with 
a  view  to  insure  the  largest  possible  subscription,  and  at 
the  best  rates,  and  to  diffuse  the  loan  as  far  as  practicable 
throughout  all  classes  of  the  community,  bids  were 
authorized  to  be  received  by  the  advertisement  as  low  as 
the  lowest  denomination  of  treasury  notes  permitted  by 
law — namely,  $50.  It  was  the  duty  of  the  department 
to  accept  noting  but  specie — being  the  first  loan  ever 
negotiated  in  specie  from  the  foundation  of  the  Govern- 
ment down  to  that  date,  and  the  first  loan,  except  that  of 
last  fall,  ever  thus  negotiated  at  or  above  par  during  a 
period  of  war.  The  magnitude  of  the  loan,  the  fluctua- 
tions below  par  of  the  previous  stock  and  notes,  the  un- 
tried and,  to  many,  alarming  restraining  operation  of  the 
constitutional  treasury,  the  heavy  expenditures  of  the 
war,  and  the  requirement  of  all  the  payments  from  time 
to  time  in  specie,  were  deemed  by  many  as  insuperable 
obstacles  to  the  negotiation  of  the  whole  of  the  loan  at  or 
above  par.     But,   under  the  salutary  provisions  of  the 

292 


Independent    Treasury  of  the   United   States 

constitutional  treasury,  the  credit  of  the  Government 
was  in  truth  enhanced  by  receiving  and  disbursing  noth- 
ing but  coin;  thus  placing  all  its  transactions  upon  a 
basis  more  sound  and  entitled  to  higher  credit  than  when 
it  held  no  specie,  had  no  money  in  its  own  possession, 
and  none  even  in  the  banks  to  pay  its  creditors  but 
bank  paper." 

The  contracting  influence  of  the  subtreasury  was 
evident  even  at  that  early  day,  and  this,  together  with 
the  refusal  to  accept  anything  but  specie,  interfered 
with  the  placing  of  loans.  Yet,  in  the  opinion  of  the 
Secretary  of  the  Treasury,  the  refusal  of  the  Government 
to  receive  or  pay  out  anything  but  specie  in  its  transac- 
tions enhanced  its  credit  and  so  made  its  efforts  to  place 
loans  more  successful  than  they  would  otherwise  have 
been.     Doubtless  this  opinion  was  to  some  extent  correct. 

The  Treasury  succeeded,  in  its  position  of  fiscal  agent 
of  the  Government,  in  placing  loans,  and  under  the  con- 
ditions of  that  time  the  subtreasury  system  was  a  success. 
But  whatever  good  was  accomplished  by  the  independ- 
ence of  the  Treasury,  acting  as  its  own  fiscal  agent,  was 
more  or  less  offset  by  the  result  of  its  independence  in 
locking  up  the  money  with  which  the  bonds  were  paid. 
"By  emissions  of  this  kind  [treasury  notes]  and  his  'war 
warrants '  Secretary  Walker  supplied  in  some  sense  the 
want  of  a  national  currency  and  relieved  local  banks  of 
deposit  from  the  heavy  strain  which  was  made  by  the 
metallic  hoard  the  Government  gathered  under  the  new 
subtreasury  act."  "  Even  so,  there  is  good  reason  for 
thinking  that  if  our  exports  had  not  been  so  large  at  the 

«  Schouler,  James,  History  of  the  United  States,  4  :  541. 
293 


National     Monetary     Commission 

time  the  loan  of  $23,000,000,  authorized  January  28, 
1847,  would  not  have  been  so  successful.  In  the  fiscal 
year    1846-47  our  imports  of  specie  were  $24,121,289.  « 

IN    THE    CIVIL    WAR. 

The  civil  war  furnishes  more  adequate  opportunities 
than  the  Mexican  for  studying  the  effects  of  fiscal  inde- 
pendence of  banks.  Its  lessons  are,  therefore,  more 
valuable. 

The  struggle  opened  with  the  country  in  a  good  indus- 
trial condition,  but  with  a  revenue  altogether  inadequate 
to  the  prosecution  of  a  great  war,  and  with  a  system  of 
taxation  which  could  not  easily  be  so  adjusted  as  to  pro- 
duce such  a  revenue.  The  Government  was  thus  com- 
pelled to  rely  on  its  credit  for  immediate  resources,  and 
the  policy  of  carrying  on  the  war  largely  by  borrowing 
was  practically  adopted.  It  was  in  the  attempts  to  place 
the  large  loans  suddenly  made  necessary  by  the  tremen- 
dous increase  in  its  expenses  that  the  Treasury  Depart- 
ment first  found  the  machinery  of  the  subtreasury  inade- 
quate to  perform  the  services  demanded  by  the  exigen- 
cies of  the  new  situation. 

A  complete  separation  from  banks  made  it  necessary 
for  the  Treasury  to  be  its  own  broker. 

The  financial  operations  of  the  Mexican  war  were  trifles 
compared  with  the  transactions  which  the  Treasury  was 
called  upon  to  undertake  when  confronted  with  the  civil 
war.  The  amount  borrowed  in  the  single  year  ending  De- 
cember, 1861,  was  over  $300,000,000,  while  the  loans  con- 
tracted during  the  whole  Mexican  war  summed  up  only 

«  H.  Ex.  Doc,  30th  Cong.,  ist  sess.,  6  :  12. 
294 


Independent   Treasury  of  the   United   States 

$49,000,000.  It  was  not  easy  for  the  Treasury  to  consti- 
tute itself  a  broker's  office  on  so  large  a  scale,  and  the 
process  would  have  been  too  slow  to  meet  the  needs  of 
the  financial  situation. 

Secretary  Chase  was  early  impressed  with  the  fact  that 
"the  safest,  surest,  and  most  beneficial  plan  would  be  to 
engage  the  banking  institutions  of  the  three  chief  com- 
mercial cities  of  the  seaboard  to  advance  the  amounts 
needed  for  disbursement.  "^^  Accordingly  he  conferred 
with  their  representatives,  and  on  their  agreeing  to  advance 
the  money  he  asked  for,  undertook  "to  issue  three-year 
7.30  bonds  or  Treasury  notes,  bearing  even  date  with  the 
subscription  and  of  equal  amount;  to  cause  books  of 
subscription  to  the  national  loan  to  be  immediately 
opened ;  to  reimburse  the  advances  of  the  banks  as  far  as 
practicable  from  this  national  subscription;  and  to 
deliver  to  them  7.30  bonds,  or  Treasury  notes,  for  the 
amount  not  thus  reimbursed."  The  object  of  turning 
to  the  banks  was  to  secure  the  needed  money  speedily; 
but  the  Secretary  wished  to  give  the  public  an  equal 
opportunity  with  the  banks  to  subscribe  for  the  loan, 
while  yet  avoiding  competition  with  them  in  the  disposal 
of  the  bonds.  The  direct  popular  subscriptions  amounted 
to  a  little  more  than  half  the  $50,000,000  advanced  by 
the  banks.  The  second  loan  of  $50,000,000  seems  to  have 
been  advanced  wholly  by  the  banks ;  and  "as  no  reason- 
able prospect  appeared  of  obtaining  terms  equally  ad- 
vantageous by  advertisement,  *  *  *  thg  Secretary 
*  *  *  arranged  this  third  loan  also  (of  Nov.  16, 
1861)    with  the  associates"* — that   is,   with  the  banks. 

«  Finance  Report,  1 861,  p.  8.  &  Finance  Report,  1861,  p.  9. 

295 


National     Monetary     Commission 

Secretary  Chase  did  attempt  to  place  loans  directly — 
that  is,  to  make  the  Government  its  own  agent — and  at 
the  same  time  he  tried  to  diffuse  the  loans.  One  of  the 
objects  which,  in  his  report  for  1863  he  tells  us,  he  kept 
steadily  in  view,  "in  the  creation  of  debt  by  the  negotia- 
tion of  loans  or  otherwise,"  was  "general  distribution." 
The  finance  report  for  1863  records  a  certain  amount  of 
success  in  the  attempt  to  place  some  of  the  later  loans  by 
popular  subscription.  "The  general  distribution  of  the 
debt  into  the  hands  of  the  greatest  possible  number  of 
holders,"  wrote  Secretary  Chase,  "  *  *  *  has  been 
accomplished  *  *  *  by  arrangements  to  popularize 
the  loans  by  giving  to  the  people  everywhere  opportunities 
to  subscribe  for  bonds.  These  subscription  arrangements 
have  been  especially  useful  and  successful.  They  have 
1)een  adopted  as  yet  with  reference  to  only  two  descrip- 
tions of  bonds — the  two  commonly  known  as  seven- 
thirties  and  five-twenties  *  *  *.  The  plan  of  dis- 
tributing the  seven-thirties  was  that  of  employing  a  large 
number  of  agents  in  many  places  and  directing  their 
action  from  the  department.  It  worked  well  for  a  time, 
but  was  soon  found  inadequate  to  the  financial  necessities 
of  the  Government."  Accordingly  this  plan  had  to  be 
abandoned  and  the  work  intrusted  to  an  agent — that  is, 
a  banker  or  broker  was  employed.  In  June,  1864,  Secre- 
tary Fessenden,  who  had  succeeded  Mr.  Chase,  found  it 
necessary  to  get  more  money.  Accordingly,  he  adver- 
tised a  loan,  which  he  was  compelled  to  withdraw  within 
a  few  days,  as  the  public  would  not  subscribe  on  the  terms 
offered.  He  turned  to  the  banks,  but  they  insisted  on 
terms  to  which  he  would  not  agree,  and  so  he  issued 

296 


Independent   Treasury  of  the   United  States 

greenbacks.  Thus,  from  the  beginning  of  the  war,  as 
early  as  1861,  the  Secretary  had  been  compelled  to  rely 
on  the  banks  for  aid,  and  his  report  for  1862  gives  full 
acknowledgment  of  their  assistance. 

The  final  breakdown  of  the  government  independence 
of  the  banks  in  raising  loans  was  emphasized  by  the  es- 
tablishment of  the  national  banks.  In  fact,  the  primary 
purpose  of  creating  the  national  banking  system  was  to 
make  a  market  for  government  bonds.  Secretary  Chase, 
in  his  report  for  1862,  said  that  "among  the  advantages 
which  would  arise  from  the  establishment  of  a  national 
banking  system  would  be  the  fact  that  the  bonds  of  the 
Government  would  be  required  for  banking  purposes;  a 
steady  market  would  be  established,  and  their  negotia- 
tion greatly  facilitated;  a  uniformity  of  price  for  the 
bonds  would  be  maintained  at  a  rate  above  that  of 
funds  of  equal  credit  but  not  available  as  security  for 
circulation."" 

The  causes  which  made  it  necessary  for  the  Government 
to  depend  on  the  banks  during  the  war  are  obvious  enough. 
In  the  first  place,  even  if  the  Government  had  established 
a  network  of  agencies  over  the  country'  for  the  purpose  of 
receiving  subscriptions  to  its  loans,  the  plan  could  not 
have  been  successful  in  meeting  its  financial  needs,  for 
the  money  was  needed  immediately.  The  loans  had  to 
be  placed  quickly,  and  their  collection  in  driblets,  so  to 
speak,  even  if  possible  in  course  of  time,  would  not  have 
filled  the  coff^ers  of  the  Treasury  with  sufficient  rapidity 
for  its  needs.  The  vaults  of  the  banks  were  the  only 
place  where  large  amounts  of  money  could  be  immediately 

«  Report  of  the  Comptroller  of  the  Currency,  1879:  113. 
297 


National     Monetary     Commission 

and  directly  obtained,  because  it  was  in  them  only  that 
sufficiently  large  amounts  were  already  collected.  This 
necessity  for  rapidity  in  getting  the  money  would  of  itself 
suffice  to  render  almost  useless,  at  the  beginning  of  a 
war,  a  system  of  agencies  for  popular  subscription. 

Still  another  explanation  of  the  resort  of  the  Govern- 
ment to  the  banks  for  loans  is  the  fact  that  the  arousing 
of  confidence  is  an  essential  element  in  the  floating  of  a 
loan,  and  for  the  Government  to  have  established  confi- 
dence directly  in  the  minds  of  thousands  of  individual 
subscribers  would  have  been,  under  the  existing  circum- 
stances, a  very  difficult  task.  But  when  the  banks  showed 
sufficient  trust  in  the  Government  to  loan  it  their  funds 
the  establishment  of  public  confidence  received  a  power- 
ful impulse.  For  the  banks  are  institutions  which  are 
supposed  to  know  the  trustworthiness  of  those  to  whom 
they  lend,  and  individual  capitalists  will  follow  where 
they  lead. 

The  lack  of  confidence  in  the  Government  was  manifest 
on  several  occasions.  "  The  prospect  of  negotiating  a  loan 
in  the  ordinary  way,"  the  Secretary  tells  us  in  1864,  "  was 
by  no  means  flattering,  as  the  notice  for  a  loan  of 
$33,000,000,  advertised  on  the  25th  day  of  June,  had  been 
withdrawn  on  the  2d  of  July.  *  *  *  fhe  Secretary 
thought  it  advisable  to  borrow  *  *  *  $50,000,000 
of  the  banks."  "■  The  negotiations  fell  through,  however, 
and  the  Secretary  again  advertised  for  a  loan,  incurring 
considerable  expense,  and  offering  "liberal  inducements 
to  stimulate  the  effort  of  corporations  and  individuals  to 

o  Finance  Report,  1864,  p.  20. 


Independent    Treasury  of  the    United   States 

dispose  of  their  notes."  But  the  effort  was  only  partly 
successful. 

The  partial  success,  in  1863,  of  the  attempt  to  place 
by  popular  subscription  may  perhaps  be  ascribed  to 
the  change  that  the  Government  made  at  the  time  in 
its  financial  policy  for  the  management  of  the  war.  The 
inadequacy  of  the  loan  policy  was  seen  and  steps  taken 
to  increase  the  revenue  from  taxation," 

The  Government  may  be  dependent  on  banks  and 
bankers  for  the  success  of  its  financial  measures,  even 
although  it  does  not  employ  them  as  agents  to  sell  its 
bonds.  The  Secretary  of  the  Treasury  may  be  his  own 
broker,  may  be  administratively  independent  of  the 
banks,  and  yet  virtually  dependent  on  them.  For  he  may 
be  compelled  to  turn  to  them  as  the  only  available  pur- 
chasers of  bonds,  and  if  so  he  must  adjust  the  terms  of 
his  loan  more  or  less  to  their  conditions.  This  happened 
in  the  civil  war,  and  it  was  this  necessity  that  led  to  the 
national  banking  law,  which  was  an  effort  to  force  the 
banks  to  sustain  the  public  credit.  The  law  was  a  con- 
fession of  the  inability  of  the  Government  to  get  on  with- 
out the  help  of  the  banks. 

The  amount  of  bonds  held  by  private  citizens  may  be 
fairly  regarded  as  a  measure  of  the  success  of  the  effort  to 
diffuse  the  loans  by  popular  subscriptions.  The  figures 
for  the  years  immediately  after  the  war  are  not  available; 
but  there  is  no  reason  to  think  that  the  analysis  of  the 
holdings  of  the  public  debt  made  in  the  census  of  1880 

oSee  H.  C.  Adams's  "Public  Debts,"  127-131.  A  table  is  given  there 
showing  the  course  of  the  government  credit  during  the  war;  its  uniformly 
downward  course  was  temporarily  checked  toward  the  end  of  1863. 

299 


National     Monetary     Commission 

represents  a  state  of  affairs  very  different  from  that  which 
originally  prevailed.  Prof.  H.  C.  Adams  summarizes  that 
investigation  by  saying:  "It  thus  appears  that  out  of  a 
total  of  over  $1,000,000,000  of  registered  debt,  private 
citizens  of  the  United  States  were  proprietors  of  the 
comparatively  small  sum  of  $417,538,850.'^ 

The  dependence  of  the  Government  on  the  banks  dur- 
ing the  civil  war,  then,  was  real,  even  in  the  instances  in 
which  it  acted  as  its  own  broker,  because  it  had  to  turn 
to  the  banks  as  customers  for  its  issues  of  stock;  but  even 
this  amount  of  dependence  was  contrary  to  the  spirit,  if 
not  the  letter,  of  the  act  of  August  6,  1846.  For  the 
whole  tenor  of  the  arguments  of  the  advocates  of  the  in- 
dependent treasury  was  that  the  Government  should  have 
nothing  whatever  to  do  with  the  banks. 

The  linking  of  the  affairs  of  the  Government  with  those 
of  the  banks  may  be  shown  to  exist  in  other  ways  than  in 
mere  dependence  on  them  as  customers,  or  as  agents  for 
the  sale  of  bonds;  although,  to  be  sure,  this  close  connec- 
tion can  be  fairly  considered  as  only  an  incident  of  the 
banking  system  which  was  adopted.  Even  if  the  Govern- 
ment had  not  sold  any  bonds  to  the  banks,  those  institu- 
tions must  have  bought  them  from  private  holders,  in 
order  to  deposit  them  with  the  United  States  Treasurer 
as  security  for  their  notes.  This  deposit,  as  is  well  known, 
makes  the  Government  the  guarantor  of  the  bank  notes; 
and  a  connection  of  this  kind  is  unquestionably  foreign 
to  the  purpose  of  the  framers  of  the  independent  treasury 
law. 

o  "  Public  Debts,"  p.  45. 


300 


Independent    Treasury  of  the    United   States 

Thus,  by  the  exigencies  of  the  war,  the  independence  of 
the  Government  with  reference  to  banks  was  set  aside, 
both  formally  and  virtually,  in  the  matter  of  negotiation 
of  loans :  formally,  in  those  instances  in  which  the  Govern- 
ment employed  them  as  its  agents;  and  virtually,  even 
in  those  cases  in  which,  though  acting  as  its  own  agent  or 
broker,  it  still  had  to  rely  on  the  banks  as  the  immediate 
source  of  the  money  which  it  borrowed. 

It  may  be  said  that  the  necessity  for  relying  on  the 
banks  as  a  source  of  loans  was  a  mere  consequence  of  the 
conditions  of  the  war  and  not  a  defect  of  the  independent 
treasury  system.  But  it  must  be  insisted  in  reply,  first, 
that  these  conditions  are  similar  to  those  which  we  must 
expect  to  recur  if  we  should  be  unfortunate  enough  to  be 
involved  in  another  great  war;  and,  second,  that  the  lack 
of  adaptability  of  the  fiscal  system  to  these  vitiates  the 
system  and  renders  it  unsuitable  in  a  great  war. 

The  use  of  the  banks,  directly  or  indirectly,  for  floating 
loans,  was  the  first  step  in  the  abandonment  of  the  prin- 
ciple of  fiscal  independence  adopted  fifteen  years  before. 
The  second  step  followed  necessarily,  and  consisted  in  once 
more  making  the  banks,  to  a  certain  extent,  depositaries 
of  public  money.  Indeed,  the  circumstances  of  the  situa- 
tion made  them  so  by  the  very  fact  of  their  receiving 
subscriptions  to  the  government  loans.  And  it  was  not 
long  before  the  general  suspension  of  specie  payments  cut 
away  the  foundation  of  the  act  of  1846,  so  far  also  as  it 
relates  to  the  use  of  "hard  money"  in  government  pay- 
ments. For  the  suspension  of  specie  payments  by  the 
banks  made  a  similar  step  a  matter  of  necessity  for  the 


301 


National     Monetary     Commission 

Government.  The  receipts  from  taxation  were  not  large 
enough  to  enable  the  Treasury  to  pay  all  its  debts  in  coin, 
and  the  banks  were  drained  of  their  gold  by  their  advances 
to  the  Government,  which  the  Secretary  of  the  Treasury 
required  should  be  in  specie.  As  the  Secretary  could  not 
borrow  fast  enough  to  meet  his  needs,  and  as  he  could 
not  use  bank  notes,  government  paper — the  well-known 
"greenbacks" — had  to  be  resorted  to. 

The  separation  of  the  Government  from  the  banks  could 
not  prevent  a  suspension  of  specie  payments  by  the  Gov- 
ernment, when  it  needed  money  in  very  large  amounts, 
although  the  authors  of  the  law  of  1846  thought  it  could. 
They  made  provision,  indeed,  for  Treasury  notes,  but  these 
were  always  to  be  equivalent  to  coin.  But  with  the 
greenbacks  even  the  pretence  of  specie  payments  was  soon 
abandoned.  Could  the  greenbacks  have  taken  the  place 
of  the  bank  notes  in  circulation,  instead  of  being  added  to 
them,  the  inflation  and  depreciation  would  probably  have 
been  less;  but  owing  to  existing  laws,  and  to  the  state  of 
public  and  congressional  opinion,  they  could  not  do  so, 
and  hence  they  constituted  a  clear  addition  to  the  circu- 
lating medium  of  the  country. 

During  the  civil  war,  then,  the  independent  treasury  law 
was  really  inoperative.  It  was  entirely  so,  practically, 
except  for  the  maintenance  of  specie  payments  in  customs 
receipts  and  for  interest  on  the  public  debt;  and  it  was 
partly  so  even  according  to  law,  because  it  was  deemed 
necessary  to  suspend  certain  sections  of  the  subtreasury 
act,  by  making  the  national  banks  depositaries  of  public 
money.  The  purposes  for  which  the  subtreasury  system 
was  created,  separation  from  banks  and  maintenance  of 

30-' 


Independent   Treasury  of  the   United   States 

specie  payments,  were  both  abandoned,  owing  to  a  stress 
of  circumstances  some  of  which,  at  least,  were  brought 
about  by  the  very  system  that  was  created  to  prevent 
them. 

The  experience  of  the  civil  war  would  seem  to  show  then 
that  even  if  it  be  considered  best  for  the  Public  Treasury  to 
negotiate  its  loans  directly  with  individual  subscribers, 
the  machinery  of  the  subtreasury  is  entirely  inadequate  to 
enable  it  to  do  so  successfully  under  the  stress  of  a  war, 
and  that  the  system  is  not  a  guaranty,  as  it  was  supposed 
by  some  of  its  authors  to  be,  that  the  Government  would, 
under  all  circumstances,  be  freed  from  the  evils  of  depre- 
ciated paper. 

For  the  depositing  and  safe-keeping  of  internal-revenue 
receipts  also  in  time  of  war  the  subtreasury  system  is 
unwieldy,  if  not  inadequate.  The  collection  of  the  great 
receipts  at  such  a  time,  by  means  of  a  complex  and  greatly 
ramified  system  of  taxation,  from  many  different  sources, 
and  from  points  often  remote  from  a  subtreasury  or  a 
United  States  depositary,  was  found  inconvenient  and 
expensive,  and  also  dangerous,  because  the  money  had  to 
be  intrusted  to  inexperienced  collectors  often  hastily 
appointed.  These  difficulties  were  so  strongly  felt  that 
when  the  national  banks  were  established  they  were  made 
depositaries  of  money  received  in  payment  of  internal- 
revenue  taxes.  The  fiscal  growth  of  the  country  was  far 
beyond  the  confines  set  for  it  by  the  independent  treasury 
act.  The  channels  provided  by  the  system  were  neither 
sufficiently  large  nor  sufficiently  ramified  to  carry  the 
increased  streams  of  revenue  with  the  rapidity  necessary 
for  the  needs  of  the  Government. 

30i 


National     Monetary     Commission 

The  only  important  service  of  the  independent  treasury 
during  the  war  and  immediately  afterwards  was  to  keep 
the  supply  of  gold  received  in  payment  of  customs  dues 
wherewith  to  pay  the  interest  on  the  public  debt  during 
the  period  of  paper  inflation.  In  supplying  the  needs  of 
the  Government  in  this  respect  the  independent  treasury 
performed  a  real  service.  But  this  service  was  as  much 
an  accident  of  the  unsound  financial  management  of  the 
war  as  a  result  of  independence  of  the  Treasury;  that  is, 
if  the  financial  management  of  the  war  had  been  such  as 
to  render  unnecessary  the  use  of  a  depreciated  paper 
currency  there  would  have  been  no  call  for  this  service 
from  the  independent  treasury.  Moreover,  in  so  far  as  it 
absorbed  gold  beyond  what  the  Government  required  for 
such  payments  as  had  to  be  made  in  specie,  it  promoted 
gold  speculation,  and  so  caused  injury  to  legitimate  busi- 
ness. 

IN    REFUNDING    OPERATIONS. 

More  can  be  said,  however,  in  favor  of  the  independent 
treasury  as  an  engine  for  the  performance  of  refunding 
operations,  although  even  for  that  purpose  it  is  not  wholly 
efficient,  at  least  for  operations  on  so  gigantic  a  scale  as 
that  which,  soon  after  the  war,  began  to  testify  to  the 
growing  credit  of  the  Government  and  the  industrial  de- 
velopment of  the  country.  Here,  again,  as  in  the  placing 
of  loans  and  the  collection  of  revenue,  there  is  needed  a 
great  network  of  agencies  all  over  the  country,  and  this 
network  can  be  well  supplied  only  by  the  banks.  Sec- 
retary Sherman  wrote  in  1880:'^  "Without  the  aid  of  the 

«  Letter  to  the  Convention  of  American  Bankers,  1880. 
304 


Independent   Treasury  of  the   United  States 

national  banks  the  unprecedented  refunding  operations 
of  last  year  would  have  been  almost,  if  not  quite,  impos- 
sible." 

The  need  which  the  Government  felt  for  depending  on 
the  banks  in  measures  of  refunding  is  of  a  somewhat  dif- 
ferent kind  from  that  which  made  them  indispensable  in 
the  financial  operations  of  the  war.  In  selling  bonds  for 
refunding  purposes  the  Treasury  often  can  be,  to  advan- 
tage, its  own  broker.  The  experience  of  Secretary  Sher- 
man shows  that  the  Government  itself  could  place  bonds 
on  the  market  at  less  expense  than  if  it  sold  them  -through 
syndicates  of  bankers.  "  Previous  to  the  summer  of  1877 
all  operations  in  refunding  were  carried  on  by  syndicates, 
the  commission  allowed  being  the  total  amount"  appro- 
priated by  the  law  to  cover  the  expense  of  conversion. 

*  *  *  But  when  Secretary  Sherman  took  the  Treas- 
ury portfolio  the  plan  of  placing  bonds  by  syndicates  was 
abandoned  for  sale  upon  public  advertisements,  or,  as  it 
was  termed, '  under  circulars.'  This  plan  was  followed  for 
the  entire  amount  of  4  percents,  with  the  exception  of 
about  $15,000,000,  which  were  secured  on  a  foreign  con- 
tract. *  *  *  Xhe  success  of  the  policy  of  sale  by  cir- 
culars may  be  seen  from  the  following  facts:  The  total 
sale  of  4  per  cent  bonds  amounted  to  $740,847,800;  the 
cost  of  this  sale,  according  to  the  plan  followed  by  the  other 
Secretaries,  would  have  been  $3,704,239;  by  the  method 
adopted  by  Mr.  Sherman  it  was  effected  at  a  cost  of 
$2,645,802.60.       The    teaching    of    this    experiment    is 

*  *     *     that  in   matters  of    administration   it  is  wise 

o  The  usual  rate  allowed  syndicates  for  placing  loans  during  the  war  was 
I  per  cent.     In  1870  it  was  reduced  to  one-half  of  i  per  cent. 

41969°— 10 20  305 


National     Monetary     Commission 

for  the  Government  to  keep  itself  independent  of  the 
agencies  of  the  banks.  Popular  enthusiasm  brings  bank- 
ing support,  but  banking  enthusiasm  can  not  arouse  popu- 
lar interest. '  '<"  But  that  Secretary  Sherman  did  not  aban- 
don the  use  of  banks  in  his  future  operations  is  shown  by 
the  fact  that  on  the  ist  of  August,  1878,  he  issued  a  cir- 
cular in  which  he  said:  "All  national  banks  are  now  in- 
vited to  become  financial  agents  of  the  Government  and 
depositaries  of  public  moneys  received  on  the  sale  of  these 
bonds  upon  complying  with  section  5153,  Revised  Stat- 
utes of  the  United  States.  All  banks,  bankers,  postmas- 
ters, and  other  public  officers,  and  all  other  persons,  are 
invited  to  aid  in  placing  these  bonds.  They  can  make 
their  arrangements  through  national  banks  for  the  deposit 
of  the  purchase  money  of  the  bonds."'' 

But  could  the  national  debt  have  been  so  easily  and  so 
soon  refunded  at  lower  rates  of  interest  if  the  national 
banks  had  not  furnished  a  ready-made  market  for  the 
new  bonds  as  a  basis  for  their  circulation?  There  is  at 
least  some  doubt  whether  it  could  have  been.  The  forced 
market  created  by  the  banks  for  the  bonds  enhanced  the 
credit  of  the  Government,  and  enabled  it  sooner  to  com- 
mand better  terms  for  its  loans.  The  difficulty  experi- 
enced in  1 89 1,  in  the  attempt  to  refund  the  3K  per  cent 
bonds  at  i  %  per  cent,  is  an  illustration  of  the  point  under 
consideration.  The  banks  refused  to  exchange  the  bonds 
they  held  for  others  at  less  than  2  per  cent,  and  the  Sec- 
retary had  finally  to  adopt  that  rate.     If  in  so  small  an 

aH.  C.  Adams's  "Public  Debts,"  235-238.  Although  banking  support 
may  not  arouse  popular  interest,  it  may  inspire  confidence. 

b  Specie  Resumption  and  Refunding  of  National  Debt,  H.  Ex.  Doc.  46th 
Cong.,  2d  sess.,  No.  9:  356. 

306 


Independent   Treasury  of  the   United   States 

operation  as  this  one  was  the  Treasury  had  to  accede  to 
the  demands  of  the  banks,  certainly  it  was  much  more 
dependent  on  them  in  the  refunding  operations  which 
were  so  large  that  if  the  banks  had  not  had  their  own 
terms  they  would  have  presented  their  bonds  for  payment 
and  seriously  embarrassed  the  Government. 

Of  course,  if  the  refunding  operations  consisted  in  the 
mere  direct  exchange  of  bonds  between  holders  and  the 
Government — that  is,  if  present  holders  were  willing  to 
give  up  their  stock  in  exchange  for  a  new  issue  at  a  lower 
rate  of  interest,  the  transaction  might  be  regarded  as  one 
of  mere  bookkeeping,  and  the  government  offices  could 
do  the  work  without  interfering  with  business.  But 
when,  as  was  the  usual  method,  new  bonds  must  be  sold 
for  cash  to  redeem  the  old  ones,  great  injury  might  be 
done,  by  contracting  the  currency,  if  the  money  paid  in 
for  new  bonds  had  to  lie  idle  in  the  vaults  of  the  sub- 
treasury,  to  await  the  maturity  of  the  bonds  called  in 
under  the  three  months'  notice  of  redemption  required  by 
law.  This  evil  could  be  obviated  under  the  independent 
method  of  placing  loans,  only  if  money  received  for  new 
bonds  were  paid  out  for  old  ones  as  fast  as  it  came  in. 
When,  however,  the  bonds  are  placed  through  the  banks 
the  money  paid  for  them  is  not  taken  from  the  channels 
of  commerce  at  all  for  any  considerable  length  of  time. 
Moreover,  here  again,  as  in  time  of  war,  the  large  stock  of 
money  is  held  by  the  banks,  or  can  be  most  easily  brought 
out  through  regular  banking  channels. 

As  illustrations  of  the  aid  rendered  by  the  banks  and 
bankers  in  refunding,  we  may  cite  some  of  the  opera- 
tions  between    1870   and   1879.      In  August,    1871,  over 

307 


National     Monetary     Commission 

$65,000,000  worth  of  5  per  cent  bonds  were  subscribed 
for,  "chiefly  by  the  national  banks."  In  the  same 
month  the  firm  of  Jay  Cooke  &  Co,  contracted  for 
$200,000,000  worth  of  the  same  bonds.  In  1876-77 
August  Belmont  &  Co.  purchased  ^}4  per  cent  bonds  to 
the  amount  of  $200,000,000.  During  the  first  four 
months  of  1879,  $497,247,750  worth  of  4  per  cents  were 
sold,  $121,000,000  being  taken  by  the  First  National 
Bank  of  New  York  and  associates,  and  the  remainder  by 
other  national  banks."  It  is  needless  to  mention  the 
unprecedented  operations  in  debt  conversion  in  still  more 
recent  years.  In  all  of  them  the  assistance  of  the  banks 
was  indispensable. 

Thus,  again,  during  and  after  the  civil  war,  as  after  the 
Revolutionary  War  and  that  of  181 2,  the  nation  was 
driven  to  avail  itself  of  the  aid  of  the  banks.  "The  first 
Bank  of  the  United  States  absorbed  nearly  one-fifth  of 
the  public  debt  in  1797.  The  second  Bank  of  the  United 
States  carried  about  the  same  proportion  of  the  debt  of 
18 16.  When  the  civil  war  closed,  in  April,  1865,  the 
newly  organized  national  banks  had  aided  the  Treasury 
in  placing  and  carrying  the  immense  loans  required  to 
maintain  the  armies  and  fleets  in  active  service  for  four 
years,  and  held  themselves  government  paper  to  the 
amount  of  $390,000,000."'' 

A  breakdown  of  the  subtreasury  system  at  still  another 
point  became  manifest  when  the  country  came  to  face  the 
question  of  resumption  of  specie  payments.  The  facts 
show   that   if   the   Treasury   had   been   left   to   its  own 

«  Report  of  the  Comptroller  of  the  Currency,  1879,  p.  108. 
&  Richardson,  H.  W.,  "The  National  Banks  "  p.  112. 

308 


Independent   Treasury  of  the   United   States 

resources — that  is,  if  it  had  been  "independent" — 
resumption  probably  could  not  have  taken  place  when  it 
did.*  "  In  the  resumption  of  specie  payments,  and  in  the 
funding  of  the  national  debt,  *  *  *  the  cooperation 
of  the  national  banks  has  been  of  essential  service  to  the 
Government.  The  banks,  in  the  aggregate,  have  con- 
stantly kept  on  hand,  as  reserve,  nearly  one-fourth  of 
the  entire  amount  of  legal-tender  notes  outstanding, 
which,  together  with  the  coin,  is  much  in  excess  of  the 
amount  of  the  reserve  required  by  law."''  The  connec- 
tion made  with  the  banks  through  the  New  York  Clearing 
House  practically  relieved  the  Treasury  of  the  necessity 
of  making  coin  payments  to  any  large  extent,  because  the 
clearing  house  agreed  to  accept  legal-tender  notes  in 
payment  of  all  dues  from  the  Government.  Moreover, 
the  banks,  although  holders  of  more  than  one-third  of  the 
amount  of  government  notes  outstanding,  refrained  from 
presenting  them  for  redemption.''  If  the  banks  had 
demanded  the  redemption  of  these  notes,  the  attempt  at 
resumption  would  have  been  gravely  imperiled.  At  this 
time  again,  as  in  the  case  of  the  bonds  sold  to  carry  on 
the  war,  the  banks  were  the  only  source  whence  it  was 
practicable  to  draw  large  sums ;  they  had  large  accumula- 
tions of  gold,  and  were  the  channels  through  which  more 
could  readily  be  obtained  by  means  of  subscriptions. 
For  "the  inconvenience  of  obtaining  coin  outside  of  the 

«For  an  account  of  the  operations  of  refunding  and  resumption,  see 
Report  of  the  Secretary  of  the  Treasury  on  "Specie  Resumption  and 
Refunding  of  the  National  Debt,"  H.  Ex.  Docs.  46th  Cong.,  2d  sess.,  vol. 
xvii,  1879-80. 

&  Finance  Report,  1879,  p.  20. 

clbid.,  1879,  p.  1 14. 


309 


National     Monetary     Commission 

large  cities  forbade  any  direct  appeal  to  the  great  body  of 
the  people." 

But  in  still  another  way  was  the  aid  of  the  banks  ren- 
dered, a  way  which  made  them  an  essential  part  of  the 
resumption  machinery.  They  were  the  agents  of  the 
Government  in  negotiating  the  loans  necessary  to  secure 
gold  for  specie  payments  and  the  depositaries  of  the 
money  received  from  the  sale  of  bonds.  As  Secretary 
Sherman  pointed  out  in  the  letter  mentioned  before," 
but  for  the  use  of  the  banks  as  depositaries  the  money 
received  for  bonds  would  have  been  withdrawn  from 
circulation  for  deposit  in  the  Treasury  vaults  to  await 
the  maturity  of  the  bonds  called  in.  The  banks  bought 
during  the  first  four  months  of  1879  nearly  $500,000,000 
worth  of  4  per  cent  bonds.  The  absorption  by  the 
Treasury  of  all  the  money  thus  paid  in  would  have  con- 
tracted the  currency  of  the  country  over  50  per  cent. 
Distress  was  caused  by  the  gradual  contraction  that  went 
on  for  the  five  years  preceding  resumption,  and  raised  an 
outcry  against  the  attempt  to  resume;  such  a  contraction 
as  would  have  taken  place  had  all  the  money  paid  in  for 
the  new  bonds  been  kept  in  the  Treasury  would  undoubt- 
edly have  caused  suffering  sufficient  to  arouse  against 
resumption  such  opposition  as  would  have  rendered  its 
success  at  least  problematical.  The  aid  of  the  banks  here 
was  absolutely  indispensable.  This  view  of  the  case  is 
not  weakened  by  the  fact,  sometimes  brought  forward  to 
belittle  the  aid  rendered  by  the  banks  at  this  juncture, 
that  although  for  them  to  have  sent   in  their  treasury 

a  See  p.  304. 


310 


Independent   Treasury  of  the   United   States 

notes  for  redemption  would  have  been  to  destroy  the  credit 
of  the  Government,  it  would  have  involved  themselves 
also  in  ruin.  For  the  dependence  of  their  safety  on  that 
of  the  Government  was  a  condition  for  which  the  Gov- 
ernment, and  not  the  banks  themselves,  was  responsible. 

THE  ivOANS  OF  1 893-1 896. 

Although  the  loans  of  1893  and  the  three  following 
years  were  not  war  loans,  they  strengthen  the  conclu- 
sions reached  from  a  study  of  the  operations  of  the  sub- 
treasury  system  before  that  time.  We  have  seen  that  in 
the  panic  of  1893  the  Treasury  was  not  only  unable  to  help 
the  banks,  but  even  to  help  itself.  The  many  difficulties 
in  which  the  country  was  plunged  by  the  silver  purchase 
law,  added  to  other  mischievous  features  of  our  currency 
system,  conjoined  with  the  fact  that  the  receipts  of  the 
Treasury  for  ordinary  expenses  showed  a  deficit,  made  it 
impossible  for  the  Secretary  to  lend  any  aid  in  the  crisis. 
The  banks,  as  we  have  seen,  were  appealed  to  on  several 
occasions  to  exchange  gold  for  notes.  In  1894  it  was 
decided  to  place  a  loan  of  $50,000,000  of  5  per  cent  ten- 
year  bonds.  The  situation  was  difficult.  "Judged  by 
executive  precedent  and  tradition,  there  was  need,  in  the 
face  of  this  dubious  situation,  to  promote  negotiations 
with  the  larger  financial  interests.  That  such  solicita- 
tion is  not  only  prudent  business  policy,  but  the  legitimate 
office  of  the  national  finance  minister,  has  been  tested  in 
nearly  all  issues  of  public  loans,  here  and  abroad,  during 
the  century. "«     Secretary  Carlisle,  however,  heeded  the 

o  Noyes,  A.  D.:  Forty  Years  of  American  Finance,  213. 


311 


National     Monetary     Commission 

prejudice  of  his  party  against  a  relationship  with  the 
banks,  and  therefore  kept  aloof  from  them.  The  banks 
were  not  in  a  position  to  be  interested  in  a  new  loan,  and 
therefore  the  loan  did  not  take  with  the  public.  It  became 
evident,  a  few  days  before  the  time  for  closing  the  sub- 
scription books,  that  the  loan  would  fail,  and  Mr.  Carlisle 
appealed  to  the  New  York  banks  to  prevent  this.  A 
syndicate  of  them  immediately  responded  and  took  up 
four-fifths  of  the  entire  issue.  Thus  we  see  that  the 
Treasury  was  unable  independently  to  float  its  bonds, 
under  the  circumstances  that  then  obtained.  Nor  could 
any  other  result  have  been  expected.  The  country  had 
just  passed  through  a  crisis,  money  had  been  hoarded,  and 
confidence  had  been  shaken.  There  was  no  ground  for 
patriotic  enthusiasm,  one  of  the  conditions  under  which 
a  popular  loan  is  likely  to  succeed,  and  every  indication 
pointed  to  the  necessity  of  lending  to  banks  and  bankers. 
The  condition  of  the  Treasury  made  it  necessary  to  place  a 
further  loan  in  November  of  the  same  year,  to  the  amount 
of  $50,000,000.  Mr.  Carlisle  had  learned  by  experience 
and  again  appealed  to  the  banks.  A  syndicate  was  gotten 
together  which  took  up  virtually  the  whole  issue. 

The  same  experience  was  passed  through  in  1895,  when 
the  Belmont-Morgan  syndicate  was  created  to  carry  the 
country  through  a  crisis.  As  we  have  seen,  they  insisted 
on  a  thirty-year  4  per  cent  bond  as  the  price  of  their  serv- 
ices. The  amount  sold  was  $62,315,400  and  the  amount 
received  by  the  Government  therefrom  was  $65,116,214. 

In  January  of  the  following  year,  it  was  necessary 
to  borrow  once  more,  and  a  new  4  per  cent  loan  of 
$T 00,000,000,  to  be  subscribed  for  in  gold  was  offered  to 

312 


Independent   Treasury  of  the    United   States 

the  public.  It  was  to  be  a  popular  loan — that  is,  it  was 
offered  for  popular  subscription.  The  country  was  well 
on  the  road  to  business  recovery;  confidence  had  been  in 
large  measure  restored,  and  the  loan  was  successful.  In- 
deed, it  was  subscribed  for  nearly  six  times  over.  There 
were  4,640  subscribers,  and  the  amount  of  their  subscrip- 
tions aggregated  $568,000,000.  The  Secretary  was  able, 
therefore,  to  place  the  loan  on  exceedingly  advantageous 
terms  and  selected  bids  which  ranged  from  110.5  to  120. 
Yet  it  appears  that  many  bids  were  made  in  behalf  of  the 
banks,  many  more  were  made  for  the  purpose  of  selling 
immediately  and  getting  any  premium  that  might  accrue, 
and  it  was  only  a  short  time  before  virtually  the  whole 
issue  was  owned  by  banks  and  bankers. 

THE   SPANISH   WAR   LOAN. 

-  In  July,  1898,  came  the  Spanish  war  loan.  This  is  no 
place  to  point  out  the  financial  mistakes  that  were  made 
in  placing  this  loan.  Its  management,  however,  throws 
a  good  deal  of  light  on  the  relation  of  the  independent 
treasury  to  popular  loans.  By  act  of  Congress  the  Gov- 
ernment offered  $200,000,000  3  per  cent  bonds  at  par. 
The  subscriptions  were  widely  distributed  and  large  in 
number.  According  to  the  report  of  the  Secretary,''  there 
were  320,000  subscribers  who  offered  $1,500,000,000,  or 
more  than  seven  times  the  amount  of  the  loan.  The  loan 
was  therefore  hailed  as  a  tremendous  success.  Again 
we  must  notice,  however,  that  many  of  the  bids  were 
made  by  individual  representatives  of  banking  houses 
and  a  great  many  more  were  made  by  people  who  bought 

«  Treasury  Rej)orl,  1898. 
313 


National     Monetary     Commission 

to  sell  soon  after  and  found  their  way  into  the  hands  of 
banks,  so  that  after  three  or  four  months  the  distribution 
of  the  loan  had  materially  changed.  The  popularity  of 
the  loan,  in  the  sense  that  it  was  a  widely  distributed 
loan,  was  less  in  evidence,  however,  when  we  remember 
that  the  subscribers  for  amounts  of  $500  or  less  of  the 
loan  numbered  230,000  out  of  the  whole  320,000.  It  is 
significant,  moreover,  that  the  Secretary  of  the  Treasury 
had  arranged  with  a  New  York  banking  syndicate  before- 
hand to  take  up  the  bonds  if  the  people  did  not  subscribe 
for  them.  The  Assistant  Secretary  of  the  Treasury  at  the 
time  tells  us  that  it  was  the  guaranty  of  the  syndicate  of 
banks  which  "put  spirit  into  the  loan  from  the  first  mo- 
ment."" A  loan  can  hardly  be  called  popular  in  which 
interest  has  to  be  stimulated  by  a  syndicate  guaranty  and 
a  large  speculative  premium.  The  bonds  were  sold  at  par, 
although  there  were  bids  for  them  as  high  as  105.  This 
can  hardly  be  regarded  as  sound  financiering.  The  ex- 
pense of  management  was  also  much  greater  than  if  the 
loan  had  been  placed  in  the  usual  way  through  a  banking 
syndicate.  It  succeeded,  moreover,  because  the  war  was 
popular.  We  may  therefore  summarize  the  causes  of  its 
success  as  the  popularity  of  the  Spanish  war,  the  previous 
arrangement  with  the  syndicate,  and  the  low  price. 

As  a  result  of  this  review  it  is  very  evident  that  the 
Treasury  felt  itself  unable  to  manage  the  loan  successfully, 
for  it  appealed  to  the  banks  to  boom  it.  The  Government 
lost  the  premium  which  it  might  have  had,  the  method 
of  placing  the  loan  added  to  the  expense  of  management, 

oThe  Forum,  September,  1898. 


314 


Independent   Treasury  of  the   United   States 

and  as  a  matter  of  fact  the  bonds  soon  got  into  the  hands 
of  the  banks,  and  the  Government  was  obliged  to  leave 
the  money  in  the  banks  to  prevent  contraction  of  the 
currency.  From  no  point  of  view  can  any  advantage  be 
found  in  the  direct  independent  management  of  the  loan 
by  the  Treasury  itself. 

CONCIvUSIONS. 

As  an  agent  for  the  fiscal  operations  during  and  conse- 
quent on  a  great  war,  it  is  evident,  then,  that  the  inde- 
pendent treasury  can  have  but  a  limited  scope,  namely, 
that  of  keeping  the  gold  wherewith  the  Government  may 
make  its  specie  payments.  But  it  can  have  even  this 
limited  scope  only  on  the  supposition  that  the  country  is 
on  a  paper  basis.  To  be  sure,  that  is  a  condition  of  affairs 
which  has  very  frequently  occurred  in  countries  carrying 
on  great  and  prolonged  wars;  but  its  necessity,  in  the 
case  of  a  wealthy  country,  is  by  no  means  self-evident. 
It  rather  seems  possible  for  such  a  nation  to  maintain 
specie  payments  even  under  so  great  a  stress  as  we  endured 
in  the  civil  war. 

If  better  financial  management  in  the  case  of  future 
wars  should  prevent  a  degeneration  to  the  use  of  irredeem- 
able paper,  even  the  present  restricted  possibilities  for 
usefulness  in  war  would  be  taken  from  the  independent 
treasury.  A  state  of  war  is,  indeed,  exceptional;  and 
the  fiscal  machinery  needed  under  its  conditions  must,  as 
a  matter  of  course,  be  exceptional  also.  But  the  unusual- 
ness  should  not  lie  so  much  in  the  nature  of  the  machinery 
as  in  the  extent  of  its  operations.  The  creation  of  a  new 
system  for  the  collection  and  disbursement  of  revenue, 

315 


National     Monetary     Commission 

difficult  under  any  circumstances,  is  doubly  so  under  the 
strain  of  war,  and  should  be  unnecessary  then.  If,  as 
was  the  case  in  the  civil  war,  specie  payments  be  sus- 
pended, and  if  the  suspension  continue  after  the  restora- 
tion of  peace,  the  independent  treasury,  as  already  pointed 
out,  absorbs  gold.  The  Government,  under  such  circum- 
stances, receives  the  gold  in  payment  of  duties,  and  as  no 
one  wants  it  to  pay  debts  that  can  be  legally  paid  in 
depreciated  paper,  the  gold  tends  to  accumulate.  The 
result  must  be  a  tendency  to  enhance  the  price  of  gold, 
or,  what  amounts  to  the  same  thing,  further  to  depreciate 
paper.  This  tendency,  of  course,  reacts  on  prices,  and 
introduces  an  element  of  uncertainty  into  business.  But, 
in  addition,  such  locking  up  of  gold  causes  speculation  in 
gold  itself,  varying  its  price  more  rapidly  and  largely  than 
would  probably  otherwise  be  the  case.  The  operations 
of  the  New  York  gold  board  furnish  an  illustration. 
With  an  excellent  raison  d'etre,  a  legitimate  field  for  its 
operations,  it  became  at  times  a  tool  which,  assisted  by 
foolish  legislation,  exerted  a  baneful  influence  on  the 
business  of  the  country.  All  these  considerations,  in 
connection  with  the  fact  that  of  the  four  great  wars  in 
which  the  country  has  engaged,  beginning  with  the 
Revolution,  in  only  one,  and  that  the  least  important 
financially,  have  we  been  able  to  do  without  the  aid  of 
banks  and  bankers,  demonstrate  the  inadequacy  of  the 
"  independent  "  system  of  financiering  for  war  purposes. 


316 


Chapter  XIII. — Proposals  for  Replacement  of  the 

SUBTREASURY   SYSTEM. 
CONDITIONS   TO   BE   MET. 

The  trend  of  the  conclusions  drawn  from  the  working 
of  the  subtreasury  system  to-day  is  that  the  harm  done 
by  it  is  greater  than  the  good,  which  is  the  opposite  of 
what  was  true  when  the  system  was  estabhshed.  At 
present  the  advantages  of  the  system  are  its  occasional 
accidental  restriction  of  the  expansion  of  bank  loans  under 
the  influence  of  speculation,  the  certainty  that  the  Gov- 
ernment can  get  its  money  for  use  promptly  without  dis- 
turbing the  market,  and  its  occasional  assistance  in 
stringencies  and  crises.  But  of  even  these  advantages 
the  first  and  third  are  uncertain,  and  the  system  is  a  con- 
tinued source  of  disturbance  to  the  money  market  and 
the  banks. 

The  primary  purpose  of  the  adoption  of  the  independent 
treasury  was  the  safety  of  the  public  money.  To  have 
continued  to  intrust  the  public  money  to  the  banks,  as 
they  were  then  constituted,  would  have  been  to  invite 
frequent  embarrassment  and  often  positive  loss  to  the 
Government.  It  may  be  said,  indeed,  that  the  deposits 
of  the  nation  would  have  been  safe  enough  if  the  life  of 
the  second  United  States  Bank  had  been  prolonged,  and 
that  the  political  strife  that  brought  about  its  destruction 
was  the  cause  which  made  the  creation  of  the  subtreasury 
system  necessary.  It  is  true  that  up  to  a  certain  time  the 
public  deposits  in  that  bank  were  safe,  and  that  the  reasons 

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National     Monetary     Commission 

for  its  overthrow  were  political  rather  than  economic.  But 
whatever  view  one  may  take  of  the  political  motives  and 
measures  that  caused  its  downfall,  there  is  good  reason  for 
thinking  that  its  preservation  as  a  semipublic  institution 
would  have  been  impossible  in  any  event;  and  certainly 
there  was  no  likelihood  at  all  of  permanent  safety  for  the 
public  deposits  in  the  banks  that  succeeded  the  national 
institution.  Therefore  some  means  had  to  be  devised  to 
secure  safety,  and  under  the  prevailing  public  opinion,  no 
better  means  could  have  been  found  than  that  which  pro- 
vides that  the  Government  should  keep  its  money  in  its 
own  vaults.  This  plan  had  its  peculiar  dangers,  to  be  sure. 
It  exposed  the  public  money  to  risk  of  loss  from  accident 
and  from  peculation  at  the  hands  of  inexperienced  officials 
who  were  necessary  under  the  new  system.  But  there  is 
no  reason  to  think  that  these  were  personally  less  honest 
than  the  officers  and  employees  of  the  banks;  and  they 
were  probably  fewer  in  number  and  less  exposed  to  the 
temptation  of  using  the  public  money  for  their  personal 
ends,  because  they  had  not  the  facihties  for  using  it  which 
were  open  to  those  employed  in  the  banks. 

A  second  purpose  of  the  establishment  of  the  independ- 
ent treasury  was  to  furnish  a  safe  currency  to  the  Govern- 
ment. This  was  one  of  the  purposes  for  which  the  second 
national  bank  had  been  chartered;  and  it  was  claimed, 
with  some  show  of  reason,  that  the  purpose  had  not  been 
fulfilled  by  that  institution.  After  the  fall  of  the  national 
bank  there  was  no  method  available  for  the  provision  of 
a  safe  currency  and  for  its  regulation,  except  for  the  Gov- 
ernment to  undertake  the  matter  itself.  This  plan,  again, 
to  be  sure,   had  objections  peculiar  to  itself.     Treasury 

3i« 


Independent   Treasury  of  the   United   States 

notes  as  well  as  bank  notes  would  depreciate  under  certain 
circumstances,  and  the  Government  could  not  always  make 
all  its  payments  in  specie.  When  the  country  committed 
itself  to  the  policy  of  fiat  paper  money,  it  attempted  to 
preserve  the  independence  of  the  Treasury  at  the  expense 
of  the  safety  of  the  currency;  and  its  entry  into  the  field 
of  note  issue  made  continued  independence  of  the  banks 
impossible. 

In  providing  for  the  safety  of  the  public  funds  and,  at 
first,  for  a  safe  currency,  the  independent  treasury  did  not 
provide,  at  least  sufficiently,  for  elasticity  in  the  circulating 
medium;  nor  did  it  insure  business  against  disturbances 
due  to  the  alternate  and  arbitrary  contractions  and  expan- 
sions of  the  currency  which  its  operations  caused.  These 
evils,  indeed,  were  of  less  moment  in  its  early  days,  be- 
cause, as  we  have  seen,  the  financial  operations  of  the  Gov- 
ernment were  not  sufficiently  large  to  do  much  harm. 
To-day  the  situation  is  different.  The  need  of  elasticity 
and  the  necessity  for  the  prevention  of  disturbance  by  the 
treasury  operations  have  become  of  greater  importance 
as  the  business  of  the  country  has  expanded.  While  in 
1846  the  Treasury  was  comparatively  isolated  from  the 
business  of  the  country,  the  influence  of  its  operations  now 
is  felt  in  every  direction;  there  is  scarcely  an  industry  in 
the  country  that  is  not  more  or  less  affected  by  its  opera- 
tions. "The  annual  and  daily  transactions  of  the  Treas- 
ury have  become  so  large,  its  financial  operations  and 
movements  touch  the  interests  of  the  people  at  so  many 
points,  that  great  care  should  be  taken  to  avoid  any  unnec- 
essary friction.  As  the  country  increases  in  wealth  and 
population,  with  the  consequent  increase  of  its  revenues 

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National     Monetary     Commission 

and  disbursements,  it  will  be  found  impossible  to  continue 
the  system  in  its  present  form."" 

As  the  national  debt  is  reduced  it  becomes  more  diffi- 
cult so  to  adjust  the  purchase  of  bonds  as  to  furnish  relief 
to  the  money  market  at  times  when  it  is  strained.  "As 
these  derangements  happen  almost  invariably  at  the  time 
of  the  moving  of  the  crops  of  the  country,  this  statement 
is  equivalent  to  saying  that  every  productive  interest  in 
the  country  must  pay  toll  to  foreign  buyers  through  the 
lower  range  of  prices  which  obtain  at  such  times,  because 
of  the  fact  that  our  arrangements  for  collecting  and  dis- 
bursing our  revenue  are  so  defective  as  to  need  an  arti- 
ficial and  violent  remedy  in  order  to  place  in  active  circu- 
lation the  moneys  withdrawn  from  the  business  of  the 
country."* 

Of  course,  safety  for  the  public  money  is  as  necessary 
now  as  it  ever  was;  but  it  can  be  secured  in  other  ways. 
The  public  money  on  deposit  in  banks  is  in  far  less  danger 
of  loss  to-day  than  at  any  previous  period  of  our  history. 
Since  the  safety  of  the  public  money  can  be  secured  as  well 
in  some  other  way  as  by  the  independent  treasury ;  and  since 
that  system  under  present  conditions  produces  effects  that 
are  of  great  injury  to  business,  the  question  naturally 
arises  whether  some  method  can  not  be  found  whereby 
the  evils  of  the  system  can  be  largely  or  wholly  obviated, 
while  yet  its  good  points  shall  be  conserved;  some  method 
which  shall  continue  the  insurance  of  safety,  but  shall 
provide  for  greater  and  more  automatic  elasticity  of  the 
currency ;  shall  put  an  end  to  the  disturbance  of  business 

«  Report  U.  vS.  Treasurer,  1886:  67-68.  &  Ibid. 


320 


Independent   Treasury  of  the   United   States 

by  arbitrary  absorptions  and  disbursements;  shall  prevent 
the  occurrences  of  stringencies  in  the  money  market  from 
government  operations,  but  shall  yet  furnish  a  means  of 
affording  relief  in  crises  to  as  great  an  extent,  at  least,  as 
the  independent  treasury  does  now.  Safety,  of  course,  is 
the  prime  requisite.  Its  loss  could  not  be  offset  by  any 
other  advantage  that  could  be  secured.  That  the  Treasury 
shall  get  its  money  when  it  needs  it,  in  full,  freely  and 
promptly,  is  the  most  important  consideration,  and  no 
proposal  that  does  not  provide  for  that  end  should  be 
considered  for  a  moment. 

But  with  safety  and  instantaneous  availability  secured, 
there  are  some  secondary  advantages  at  which  every  gov- 
ernment should  aim  in  its  system  of  keeping  the  public 
funds.  The  most  important  of  these  is,  that  the  receipts 
of  the  Government  shall  not  be  locked  away  from  use  in  the 
trade  of  the  country.  A  second  is  that  the  system  shall 
be  elastic  enough  to  conform  to  changes  in  the  fiscal  policy 
of  the  Government.  For  example,  it  must  be  able  to  pre- 
vent the  evils  that  must  follow  from  surplus  financiering, 
and  be  ready  to  furnish  the  means  necessary  for  the  Gov- 
ernment to  carry  on  its  operations  through  periods  of 
deficits. 

Again,  whatever  system  prevails,  any  profits  that  come 
from  the  use  of  the  money  of  the  Government  on  deposit 
should  accrue,  in  part  at  least,  to  the  Government.  The 
method  which  prevailed  for  some  years,  of  depositing 
the  money  of  the  people  in  banks  without  interest,  was 
merely  a  means  of  permitting  private  interests  to  profit 
at  the  expense  of  the  people, 

41969° — 10 21  321 


National     Monetary     Commission 

CLASSIFICATION    OF   PROPOSALS. 

All  the  proposals  that  have  been  made  for  the  replace- 
ment of  the  independent  treasury  may  be  roughly  classi- 
fied as  follows: 

1.  Enlarge  the  present  national  bank  depositary  sys- 
tem by  putting  the  receipts  of  the  Government  imme- 
diately into  the  banks  when  collected,  without  a  deposit 
of  bonds  as  security,  the  banks  to  pay  a  reasonable  rate 
of  interest  to  the  Government  on  its  balances,  and  the 
government  officers  to  check  against  accounts  like  other 
depositors.  Deposit  in  banks  throughout  the  country, 
as  now;  or  only  in  reserve  city  banks. 

2.  Modify  the  first  proposal  by  dividing  the  country  into 
clearing-house  or  bank  depositary  districts.  Establish  a 
clearing  house  for  each  district,  and  enlarge  the  functions 
of  the  clearing  house  so  as  to  make  it  the  agent  for  all  the 
banks  of  the  district,  with  which  the  government  officers 
may  deal  directly.  Under  this  system  all  government 
moneys  will  be  deposited  with  the  clearing  house  or  district 
bank,  which  will  be  responsible  to  the  Government,  and 
it  may  redeposit  with  the  banks  of  its  district  under  ar- 
rangements to  be  provided. 

3.  Establish  a  central  bank  independent  of  the  Govern- 
ment and  of  existing  banks,  which  shall  be  the  depositary 
and  fiscal  agent  of  the  Government. 

4.  Establish  a  federated  bank  to  include  all  national 
banks.  This,  of  course,  is  a  form  of  central  bank.  In- 
stead of  being  independent  of  the  existing  banks,  it  would 
be  a  federation  of  them. 

5.  Make  the  Treasury  itself  a  government  bank  by  en- 
larging its  present  banking  functions  and  giving  the  Secre- 
tary a  stafif  of  expert  business  and  banking  advisers. 

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Chapter  XIV. — Summary. 

(a)  as  to  history. 

Our  study  of  the  history  and  effects  of  the  methods  by 
which  the  United  States  Government  has  kept  the  pubHc 
money  may  be  briefly  summarized  as  follows : 

1.  The  policy  of  the  Government  has  been  changeable. 
In  the  first  few  years  after  the  adoption  of  the  Constitu- 
tion, before  the  subject  attracted  serious  public  attention, 
there  were  no  specific  places  for  the  custody  of  the  public 
money,  and  it  was  left  largely  in  the  hands  of  collecting 
and  disbursing  officers. 

2.  During  the  existence  of  the  first  and  second  United 
States  Banks,  that  is  from  1796  to  181 1,  and  from  1816 
to  1833,  the  date  of  the  "removal  of  the  deposits,"  the 
public  money  was  kept  mainly  in  these  institutions  and 
their  branches.  Nevertheless,  even  during  these  periods 
some  state  banks  were  employed. 

3.  In  the  interim  between  the  closing  of  the  first  United 
States  Bank  and  the  opening  of  the  second,  the  public 
money  was  kept  mainly  in  the  state-chartered  banks. 
These  banks  were  also  used  after  the  Government  ceased 
to  employ  the  second  United  States  Bank  in  1833,  and 
also  after  the  expiration  of  the  charter  of  that  bank  until 
the  establishment  of  the  independent  treasury  in  1846. 

4.  Beginning  with  1847,  immediately  after  the  establish- 
ment of  the  independent  treasury,  the  public  money  was 
kept  in  the  Treasury  and  subtreasuries,  and  no  banks 
were  used  until  after  the  establishment  of  the  present 

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National     Monetary     Commission 

national  banking  system,  in  1863.  Since  that  time  the 
depositary  banks  have  supplemented  the  use  of  the  sub- 
treasuries  as  places  for  the  keeping  of  the  public  money. 

5.  In  the  past  one  hundred  and  twenty  years,  therefore, 
there  are  only  seventeen,  1 847-1 864,  in  which  the  Gov- 
ernment did  not  use  depositary  banks  for  keeping  the 
public  money. 

6.  The  evidence  therefore  shows  that  there  has  been, 
uniformly,  a  strong  tendency  for  the  Government, 
throughout  its  history,  to  use  banks. 

7.  The  causes  of  this  tendency  are  shown  to  have  been 
the  greater  convenience  in  the  management  of  the  public 
money,  the  desire  of  the  Secretary  and  the  public  that 
government  fiscal  operations  should  interfere  as  little  as 
possible  with  the  monetary  circulation  and  with  business 
conditions,  the  necessities  of  the  Government  and  pressure 
from  banking  and  other  interests. 

8.  Under  the  influence  and  pressure  described,  first  the 
Secretary  of  the  Treasury,  and  later  Congress,  have  given 
way,  and  virtually  abandoned  the  policy  of  independence 
in  the  keeping  and  management  of  public  money  which 
was  established  by  the  act  of  August,  1846.  Congress 
authorized  the  use  of  national  banks  in  which  to  deposit 
receipts  from  internal  revenue.  With  some  vacillations, 
the  extent  of  tjie  use  of  the  banks  as  depositaries  for  these 
receipts  has  steadily  increased.  By  recent  legislation 
receipts  from  customs  may  also  be  deposited  in  the  banks. 
Under  the  first  interpretation  of  the  law  permitting  these 
deposits,  they  could  accrue  only  as  the  collecting  officers 
placed  the  money  received  by  them  in  the  banks  and  not 


324 


Independent   Treasury  of  the   United   States 

from  the  transfer  of  government  receipts  once  deposited 
in  the  treasuries.  By  later  practice  the  latter  method  of 
deposit  has  also  been  adopted  and  is  claimed  by  some  to 
be  legal.  Under  present  practice  and  legislation,  there- 
fore, the  Secretary  of  the  Treasury  has  a  free  hand  to  put 
any  and  all  receipts  of  public  money  in  the  depositary 
banks.  The  independence  of  the  Treasury  depends 
entirely  upon  the  will  of  the  Secretary, 

9.  A  further  departure  from  the  policy  of  independence 
is  shown  by  the  course  of  opinion  and  legislation  concern- 
ing security  for  deposits.  Under  the  law  as  passed,  public 
deposits  were  to  be  secured  by  United  States  bonds  and 
otherwise.  This  was  understood  to  mean  United  States 
bonds  in  addition  to  a  personal  bond.  Eight  years  ago 
the  phrase  was  differently  interpreted,  and  banks  were 
permitted  to  secure  deposits  on  the  basis  of  other  than 
United  States  bonds  as  security.  The  practice  thus 
established  was  legalized  between  two  and  three  years 
ago. 

10.  At  first  the  banks  which  obtained  public  money  on 
deposit  were  expected  to  keep  a  reserve  against  it,  as  pro- 
vided by  the  law  of  their  being.  Some  seven  or  eight 
years  ago  this  practice  was  broken  and  the  banks  allowed 
to  hold  public  deposits  without  protecting  them  by  a 
reserve.  The  practice  thus  initiated  was  also  later  made 
legal. 

1 1 .  Finally,  with  all  these  changes,  the  amount  of  public 
money  deposited  with  the  banks  has  steadily  increased, 
until  at  one  time  in  recent  years,  only  a  comparatively 
small  working  balance  was  kept  in  hand  by  the  Treasury 
itself. 

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National     Monetary     Commission 

(b)    as   to    operation    and    INFIvUENCE. 

Our  study  of  the  operation  of  the  independent  treasury 
during  the  period  of  its  independence,  that  is,  during  the 
period  of  the' smallest  use  of  depositary  banks  since  1864, 
has  led  us  to  the  following  conclusions: 

1.  The  subtreasury  system  disturbs  the  money  market 
in  ordinary  times  by  its  irregular  intake  and  output  of 
money. 

2.  If  the  intake  happens  to  occur  on  a  rising  specula- 
tive market  it  may  do  some  good  by  restricting  specula- 
tion. 

3.  If  the  intake  happens  to  occur  at  a  time  when  business 
operations  call  for  an  easier  market,  the  influence  is  likely 
to  be  harmful. 

4.  Corresponding  results  flow  from  the  relative  times 
of  occurrence  of  the  output. 

5.  These  results  occur  when  government  receipts  and 
expenditures  are  approximately  equal.  Their  influences 
are  intensified  at  times  when  government  receipts  for  con- 
siderable periods  exceed  expenditures. 

6.  On  the  whole,  the  evil  done  by  the  independence  of 
the  Treasury,  both  in  ordinary  times  and  in  times  of  sur- 
plus financiering,  exceeds  the  good. 

7.  In  times  of  crises,  or  panic,  the  independent  treasury 
may  aid  the  money  market  by  depositing  a  surplus  revenue 
in  the  banks  and  thus  restoring  the  money  to  circulation; 
by  prepaying  interest  on  the  public  debt  when  business 
needs  a  larger  volume  of  currency,  by  "timing"  interest, 
pension,  and  other  payments;  and  by  buying  bonds. 


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Independent   Treasury  of  the    United   States 

8.  All  of  these  methods  do  restore  to  circulation  the 
money  collected  in  taxes.  The  first  method  is  open  to  the 
objection  that  pressure  from  the  banks  for  a  general  dis- 
tribution may  defeat  the  purpose  of  the  deposits,  by  pre- 
venting them  from  being  made  in  sufficient  measure  where 
they  are  most  needed.  The  charge  of  favoritism  has  also 
been  made  in  the  selection  of  banks.  If  such  deposits 
are  to  be  made,  there  is  no  good  reason  for  requiring 
security ;  and  there  is  also  no  good  reason  for  not  insisting 
that  the  banks  shall  take  such  precaution  in  the  way  of 
maintaining  a  proper  reserve  against  these  deposits  as 
they  do  in  the  case  of  other  deposits.  Moreover,  if  deposits 
are  to  be  made  in  banks,  the  Secretary  of  the  Treasury 
should  be  allowed  to  check  against  them  instead  of  being 
compelled  to  use  the  present  compressed  method  of  with- 
drawal. 

9.  The  prepayment  of  interest  and  the  "timing"  of 
other  payments  are  too  trivial  to  be  worthy  of  a  great 
government.  Resort  to  such  practices  should  not  be  nec- 
essary. Moreover,  the  proper  time  for  the  Government, 
like  any  other  debtor,  to  pay  interest  is  when  it  is  due. 

10.  Attempts  made  to  relieve  the  money  market  by 
buying  bonds  are  open  to  the  objection  that  there  is  a  loss 
involved  in  prepaying  the  debt.  The  Government  should 
not  have  a  revenue  larger  than  it  needs.  Apparent  saving 
of  interest  is  at  the  expense  of  the  productive  employ- 
ment of  capital  by  individuals  and  corporations. 

11.  All  the  modes  of  relieving  the  money  market  are 
open  to  the  three  general  objections  that  the  process  puts 
too  great  pow^r  in  the  hands  of  the  Secretary ;  that  how- 


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National     Monetary     Commission 

ever  well  he  discharges  his  responsibility,  he  is  likely  to 
make  mistakes  which  will  make  the  situation  worse;  and 
that  any  such  interference  must  be,  from  its  nature,  arbi- 
trary. 

12.  Objections  may  be  made  against  the  independent 
treasury  in  the  fiscal  operations  of  the  Government  in  time 
of  war.  Although  by  means  of  the  system  the  Treasury 
succeeded  in  placing  its  loans  during  the  Mexican  war,  it 
failed  to  do  so  in  the  civil  war.  It  also  failed  during  the 
time  following  1890,  although  this  was  not  a  period  of  war. 
It  succeeded,  in  a  way,  in  placing  the  Spanish  war  loan 
directly,  but  ventured  to  make  the  experiment  only  after 
securing  the  assurance  of  the  banks  that  they  would  sus- 
tain it.  In  all  important  loan  negotiations  in  the  past 
fifty  years  the  Treasury  has  been  obliged,  in  one  way  or 
another,  to  rely  upon  the  banks  for  aid. 

13.  The  main  advantage  claimed  for  the  direct  placing 
of  loans  by  the  independent  treasury  is  that  the  loans 
are  more  widely  distributed  or  more  popular.  Experience 
shows  that  this  is  not  the  case.  Even  though  the  loan 
be  widely  distributed  at  first,  the  securities  soon  become 
concentrated  in  the  hands  of  a  few  holders,  principally  the 
banks.  There  is  reason  to  think,  too,  that  in  time  of  war 
a  loan  can  be  placed  at  less  expense  through  banks  and 
banking  syndicates. 

ADVANTAGES    OF   THE   INDEPENDENT   TREASURY, 

I.  The  money  may  be  regarded  as  absolutely  safe. 
Experience  shows,  however,  that  defalcations  and  thefts 
may  occur  under  the  system. 


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Independent   Treasury  of  the   United   States 

2.  The  system  has  had  the  support  of  popular  opinion. 
This  support  arises  from  the  fact  that  the  system  worked 
well  for  some  time  after  it  was  established,  thus  forming 
a  striking  contrast  with  the  evil  operation  of  the  state 
bank  depositaries.  Moreoever,  there  is  a  popular  dis- 
trust of  banks,  especially  large  ones. 

3.  The  absorptions  and  disbursements  of  money  by  the 
Government  do  good  when  they  happen  to  coincide  with 
the  needs  of  the  money  market. 

PROPOSALS  FOR  REPLACEMENT. 

I.  The  deposit  of  all  government  receipts  in  the  national 
banks  at  the  places  of  collection,  the  Secretary  to  check 
against  these  deposits  as  he  needs  the  money.  Whether 
this  would  remove  the  evils  of  the  irregular  action  of  the 
subtreasury  system  would  depend  mainly  upon  the  way 
in  which  the  banks  were  managed.  Unless  they  assumed 
the  responsibility  of  making  proper  provision  for  the 
seasonal  demands  for  money,  no  great  advantage  would  be 
gained.  Moreover  their  exclusive  use  would  not  altogether 
do  away  with  alternate  pressure  and  relaxation  in  the 
money  market  due  to  the  government  operations.  For 
the  Government  must  collect  its  revenue  and  make  its 
payments.  At  times  when  its  income  is  heavy,  its  deposits 
would  be  heavy  and  cause  great  temporary  withdrawals 
of  money  from  circulation.  The  condition  of  the  London 
money  market  in  the  latter  part  of  April,  19 10,  illustrates 
this.  There  was  unsteadiness  in  the  market  in  anticipa- 
tion of  the  withdrawal  of  a  large  amount  of  money  to  pay 
the  income  tax.     "Nearly  $120,000,000  were  due  on  this 


329 


National     Monetary     Commission 

account.  The  money  will  go  into  the  Bank  of  England,  of 
course,  but  it  can  not  be  let  out  excepting  in  the  ordinary 
course  of  business.  These  large  payments  will  occasion  a 
large  sale  of  securities  with  a  depreciation  of  their  price.  "'^ 

2.  The  bank  district,  or  clearing-house  district,  system. 
This  has  the  advantage  of  not  being  too  centralized  and, 
therefore,  possibly  less  objectionable  to  the  public.  It 
amounts  virtually  to  a  central  cooperative  banking  asso- 
ciation, the  controlling  board  being  the  representatives 
of  the  clearing-house  districts  elected  by  the  banks  of  the 
districts.  The  autonomy  of  the  individual  banks  would  not 
be  interfered  with,  nor  would  it  be  necessary  to  interfere 
with  the  issue  of  notes  by  the  individual  banks. 

3.  An  independent  central  bank,  located  in  the  country's 
money  center. 

4.  A  federated  bank  or  a  bank  of  banks. 

a  Daily  paper. 


330 


APPENDICES. 


References. 


Adams,  H.  C:  Public  Debts.     New  York,  1887. 

American  State  Papers:  Finance. 

Andrew,  A.  Piatt:    The  Partial  Responsibility  of  Secretaries  Gage  and 

Shaw  for  the  crisis  of  1907.     Bankers'  Mag.,  76  :  493. 
:  The  United  States  Treasury  and  the  Money  Market.     Publ.  Amer. 

Econ.  Assoc,  3d  ser.  9  :  i  :  218. 
:    The  Treasury  and  the  Banks  under  Secretary  Shaw.     Quarterly 


Journal  of  Economics,  21  :  519-568. 
Bancroft,  George:  Literary  and  Historical  Miscellanies. 
Bankers'  Magazine.     New  York. 

Bankers'  Association,  Proceedings  of  American.     New  York. 
Benton,  Thos.  H.  :  Abridgment  of  Debates  of  Congress  from  1789  to  1856. 

16  V.     New  York,  1857-1861. 
:  Thirty  Years' View;   or  A  History  of  the  Working  of  the  American 

Government  for  Thirty  Years,  from  1820  to  1850.    New  York,  1854- 
1856. 
BollES,  a.  S.:    Financial   History  of   the  United   States.     2d  ed.     New 

York,  1 884-1 886. 
Bourne,  E.  G.  :  History  of  the  Surplus  Revenue  of  1837.     New  York,  1885. 
Bradstreet's.     New  York. 

Burgess,  John  W.:  The  Middle  Period,  1817-1858.     New  York,  1897. 
CaIvHOun,  John  C.  :    Works  of,  ed.  by  R.  K.  Crall6,  Columbia,  S.  C.  and 

New  York,  1853-1857. 
Catteral,  R.  C.  H.  :  The  Second  Bank  of  the  United  States.    Chicago,  1903. 
Clay,  Henry:   Works  of;   ed.  by  Calvin  Colton,  7  v.     New  York,  1897. 
Cleveland,  F.  A.:  The  Bank  and  the  Treasury.     New  York,  1905. 
CoLTON,  C.  C:  Public  Economy  for  the  United  States.     New  York,  1853. 
CONANT,  C.  A.:  A  History  of  Modern  Banks  of  Issue.     New  York,  1897. 
Commercial  and  Financial  Chronicle.     New  York. 
Democratic  Review,  XVn.     New  York. 
Dewey,  D.  R.:  The  Financial  History  of  the  United  States.     New  York, 

3d  ed.,  1907. 
DuANE,  W.  J.:   Narrative  and  Correspondence  concerning  the  Removal  of 

the   Deposits  and   Occurrences  connected   therewith.     Philadelphia, 

1838. 

331 


National     Monetary     Commission 

Dunbar,  C.  F.  :    Laws  of  the  United  States  relating  to  Currency,  Finance, 

and  Banking  from  1789  to  1891.     Boston,  1891. 
:    Chapters  on  the  Theory  and  History  of  Banking.     2d  ed.     New 

York,  1904. 
Dunn's  Weekly  Review.     New  York. 
Aegis,  The.    Students'  Paper,  University  of  Wisconsin.     Report  of  Debate 

on  Independent  Treasury.     March  8,  1895. 
Ferris,  J.  A. :    Financial  Economy  of  the  United  States.     vSan  Francisco, 

New  York,  1867. 
Forum,  The.     New  York. 

Gallatin,  Albert:   Writings  of;  ed.  by  Henry  Adams,  Philadelphia,  1879. 
Gauss,  H.  C:  The  American  Government.     New  York,  1908. 
Gibbons,  J.  S.:    Public  Debt  of  the  United  States.     New  York,  1867. 
Gilbart,  J.  W. :  History  of  Banking  in  America.     London,  1837. 
GiLLETT,  R.  H.:  Life  and  Times  of  Silas  Wright.     Albany,  1874. 
Gouge,  W.  M.:    An  Inquiry  into  the  Expediency  of  Dispensing  with  Bank 

Agency  and  with  Bank  Paper  in  the  Fiscal  Concerns  of  the  United 

States.     Philadelphia,  1837. 
Government  Publications:    Executive  Documents;    House  and  Senate 

Documents  and  Reports;   Finance  Reports;  Congressional  Record,  etc. 
GrosvEnor,  W.  M.:  American  Securities.     New  York,  1885. 
Hamilton,  Alexander,  Works  of:  Ed.  by  J.  C.  Hamilton,  New  York, 

1850-51.     Also  ed.  by  Henry  Cabot  Lodge,  9  v.,  New  York,  1885-86. 
Hammond,  J.  D.:    LifeandTimesof  Silas  Wright.     Syracuse,  1852. 
Harper's  Magazine,  New  York,  xliv.     481. 
Hock,  Carl  F.  von:    Die  Finanzen  der  Vereinigten   Staaten,  Stuttgart, 

1867. 
HOLST,  H.  von:  Constitutional  History  of  the  United  States.     Chicago, 

1877-1892. 
Hunt's  Merchant's  Magazine.     New  York. 
Independent,  The.     New  York,  1872-3. 
Juglar,  C:    A  Brief  History  of  Panics  in  the  United  States.     Ed.  by  DeC. 

W.  Thomas.     New  York,  1893. 
KiNLEY,  David:  The  Independent  Treasury  of  the  United  States.     New 

York,  1893. 
:  The  Relation  of  the  United  States  Treasury  to  the  Money  Market. 

Publ.  Amer.  Econ.  Assoc,  3d  ser.  9:1:  199. 
Knox,  J.  J.:  United  States  Notes.     3d  ed.     New  York,  1894. 
Lalor,  J.  J.:  Cyclopedia  of  Political  Science,  etc.     Chicago,  1882-1884. 
LamphERE,  G.  N.:  United  States  Government.     Philadelphia,  1880. 
Lauck,  W.  J.:  Causes  of  the  Panic  of  1893.     New  York,  1907. 
Laughlin,  J.  Laurence:  See  North  American  Review  as  quoted. 
LiPPiNCOTT's  Magazine.     Philadelphia,  December,  1873. 
Lodge,  H.  C.  :  Life  of  Daniel  Webster.     Boston,  1883  and  1899. 
Mackenzie,  W.  L.  :  Life  and  Times  of  Martin  Van  Buren.     Boston,  1846. 


332 


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MUHLEMAN,  M.  A.:  Monetary  and  Banking  Systems.     New  York,  1908. 

NiLES,  HezEkiah:  Weekly  Register,  1811-1848. 

North  American  Review.     New  York,  137:  552-564. 

NOYES,  A.  D.:  Forty  Years  of  American  Finance,  New  York.      1909. 

PEnn  Monthly  Magazine.     Philadelphia,  July,  1882. 

Phillips,  J.  B. :  Methods  of   Keeping   the   Public   Money   of   the   United 

States.     Publ.  Mich.  Pol.  Sci.  Assoc.  4:3. 
Pratt,  A.  S.  &  Sons:  Digest   of   the    National    Bank    Act.     Washington, 

1870. 

:  Pratts'  Digest.     Washington,  1908. 

RaguET,  Condy:    A    Treatise  on   Currency   and   Banking.     Philadelphia, 

1839. 
Rhodes  Journal  op  Banking.     (Now  combined  with  Bankers'  Magazine.) 
Richardson,  H.  W.  :  The  National  Banks.     New  York,  1880. 
Sargent,  Nathan:  Public  Men  and  Events.     Philadelphia,  1875. 
SCHURZ,  Carl:  The  Life  of  Henry  Clay.     Boston,  1887. 
ShEpard,  E.  M.:  Martin  Van  Buren.     Boston,  1888. 
Story,  Joseph:  Commentaries  on  the  Constitution.     Boston,  1873. 
Sumner,  W.  G.  :  Andrew  Jackson,      nth  ed.     New  York,  1888. 

:  History  of  American  Currency.     New  York,  1876. 

:  History  of  Banking  in  the  United  States.     New  York,  1896. 

Taussig,  F.  W.  :  The  Tariff  History  of  the  United  States.     4th  ed.     New 

York,  1898. 
:  The  Silver  Situation  in   the  United   States.     Am.   Econ.   Assoc. 

Public.  7:1.     New  York,  1893. 
Upton,  J.  K. :  Money  in  Pohtics.     Boston,  1884. 
United  States  Supreme  Court  Reports. 
Walker,  Francis  A.:  Political  Economy.     New  York,  1883. 

:  Money,  Trade,  and  Industry.     New  York,  1889. 

Walker,  J.  H.:  Money,  Trade,  and  Banking.     Boston,  1894. 
Webster,  Daniel:  Writings  and  Speeches.     Boston,  1903. 
Wirth,  M.  W.  G.:  Geschichte  der  Handelskrisen.     Frankfurt,  1890. 
World's  Congress  op  Bankers  and  Financiers.     Chicago,  1893. 
Young,  A.  W.:  American  Statesman.      1856.     New  ed.      1888. 


333 


SUBTREASURY    LaW    AND   AMENDMENTS. 

AN  ACT  To  provide  for  the  better  organization  of  the  Treasury,  and  for 
the  collection,  safe-keeping,  transfer,  and  disbursement  of  the  public 
revenue. 

Whereas  by  the  fourth  section  of  the  act  entitled  "An 
act  to  estabUsh  the  Treasury  Department,"  approved 
September  second,  seventeen  hundred  and  eighty-nine, 
it  was  provided  that  it  should  be  the  duty  of  the  Treasurer 
to  receive  and  keep  the  moneys  of  the  United  States,  and 
to  disburse  the  same  upon  warrants  drawn  by  the  Secretary 
of  the  Treasury,  countersigned  by  the  Comptroller,  and 
recorded  by  the  Register,  and  not  otherwise;  and  whereas 
it  is  found  necessary  to  make  further  provisions  to  enable 
the  Treasurer  the  better  to  carry  into  effect  the  intent  of 
the  said  section  in  relation  to  the  receiving  and  disbursing 
the  moneys  of  the  United  States.      Therefore : 

Section  i  .  Be  it  enacted  by  the  Senate  and  House  of  Repre- 
sentatives of  the  United  States  of  America  in  Congress 
assembled,  That  the  rooms  prepared  and  provided  in  the 
new  Treasury  building  at  the  seat  of  government  for 
the  use  of  the  Treasurer  of  the  United  States,  his  assistants 
and  clerks,  and  occupied  by  them,  and  also  the  fireproof 
vaults  and  safes  erected  in  said  rooms  for  the  keeping  of 
the  public  moneys  in  the  possession  and  under  the  imme- 
diate control  of  said  Treasurer,  and  such  other  apartments 
as  are  provided  for  by  this  act  as  places  of  deposit  of  the 
public  money,  are  hereby  constituted,  and  declared  to  be, 
the  Treasury  of  the  United  States.  And  all  moneys  paid 
into  the  same  shall  be  subject  to  the  draft  of  the  Treasurer, 
drawn  agreeably  to  appropriations  made  by  law. 

334 


Independent   Treasury  of  the    United   States 

Sec.  2.  And  he  it  further  enacted,  That  the  mint  of  the 
United  States,  in  the  city  of  Philadelphia,  in  the  State  of 
Pennsylvania,  and  the  branch  mint  in  the  city  of  New 
Orleans,  in  the  State  of  Louisiana,  and  the  vaults  and 
safes  thereof,  respectively,  shall  be  places  of  deposit  and 
safe-keeping  of  the  public  moneys  at  these  points  respect- 
ively; and  the  treasurers  of  the  said  mint  and  branch  mint, 
respectively,  for  the  time  being,  shall  be  assistant  treas- 
urers under  the  provisions  of  this  act,  and  shall  have  the 
custody  and  care  of  all  public  moneys  deposited  within  the 
same,  and  shall  perform  all  the  duties  required  to  be  per- 
formed by  them  in  reference  to  the  receipt,  safe-keeping, 
transfer,  and  disbursement  of  all  such  moneys,  according 
to  the  provisions  hereinafter  contained. 

Sec.  3.  And  be  it  further  enacted,  That  the  rooms  which 
were  directed  to  be  prepared  and  provided  within  the 
custom-houses  in  the  city  of  New  York,  in  the  State  of 
New  York,  and  in  the  city  of  Boston,  in  the  State  of  Mas- 
sachusetts, for  the  use  of  receivers-general  of  public  moneys, 
under  the  provisions  of  the  act  entitled  "An  act  to  pro- 
vide for  the  collection,  safe-keeping,  transfer,  and  dis- 
bursement of  the  public  revenue,"  approved  July  fourth, 
eighteen  hundred  and  forty,  shall  be  for  the  use  of  the  as- 
sistant treasurers  hereinafter  directed  to  be  appointed  at 
those  places,  respectively;  as  shall  be  also  the  fireproof 
vaults  and  safes  prepared  and  provided  within  said  rooms 
for  the  keeping  of  the  public  moneys  collected  and  depos- 
ited with  them,  respectively;  and  the  assistant  treasurers 
from  time  to  time  appointed  at  those  points,  shall  have  the 
custody  and  care  of  the  said  rooms,  vaults,  and  safes, 
respectively,   and   of   all   the    public    moneys   deposited 

335 


National     Monetary     Commission 

within  the  same,  and  shall  perform  all  the  duties  required 
to  be  performed  by  them  in  reference  to  the  receipt,  safe- 
keeping, transfer,  and  disbursement  of  all  such  moneys,  ac- 
cording to  the  provisions  of  this  act. 

Sec.  4.  And  he  it  further  enacted,  That  the  officers,  with 
suitable  and  convenient  rooms,  which  were  directed  to  be 
erected,  prepared,  and  provided  for  the  use  of  receivers- 
general  of  public  money,  at  the  expense  of  the  United  States, 
at  the  city  of  Charleston,  in  the  State  of  South  Carolina, 
and  at  the  city  of  St.  Louis,  in  the  State  of  Missouri,  under 
the  act  entitled  "  An  act  to  provide  for  the  collection,  safe- 
keeping, transfer,  and  disbursement  of  the  public  revenue," 
approved  July  fourth,  eighteen  hundred  and  forty,  shall 
be  for  the  use  of  the  assistant  treasurers  hereinafter 
directed  to  be  appointed  at  the  places  above  named;  as 
shall  be  also  the  fireproof  vaults  and  safes  erected  within 
the  said  offices  and  rooms  for  the  keeping  of  the  public 
money  collected  and  deposited  at  those  points,  respectively; 
and  the  said  assistant  treasurers  from  time  to  time  ap- 
pointed at  those  places  shall  have  the  custody  and  care 
of  the  said  offices,  vaults,  and  safes,  erected,  prepared,  and 
provided  as  aforesaid,  and  of  all  the  public  moneys  depos- 
ited within  the  same,  and  shall  perform  all  the  duties  re- 
quired to  be  performed  by  them  in  reference  to  the  receipt, 
safe-keeping,  transfer,  and  disbursement  of  all  such 
moneys,  according  to  the  provisions  hereinafter  contained. 

Sec.  5.  And  be  it  further  enacted,  That  the  President 
shall  nominate,  and,  by  and  with  the  advice  and  consent 
of  the  Senate,  appoint  four  officers,  to  be  denominated 
"assistant  treasurers  of  the  United  States,"  which  said 
officers  shall  hold  their  respective  offices  for  the  term  of 

336 


Independent   Treasury  of  the    United  States 

four  years,  unless  sooner  removed  therefrom;  one  of  which 
shall  be  located  at  the  city  of  New  York,  in  the  State  of 
New  York;  one  other  of  which  shall  be  located  at  the  city 
of  Boston,  in  the  State  of  Massachusetts;  one  other  of 
which  shall  be  located  at  the  city  of  Charleston,  in  the 
State  of  South  Carolina;  and  one  other  at  St.  Louis,  in  the 
State  of  Missouri ;  and  all  of  which  said  officers  shall  give 
bonds  to  the  United  States,  with  security  according  to  the 
provisions  hereinafter  contained,  for  the  faithful  discharge 
of  the  duties  of  their  respective  offices. 

Sec.  6.  And  he  it  further  enacted,  That  the  Treasurer  of 
the  United  States,  the  treasurer  of  the  mint  of  the  United 
States,  the  treasurers,  and  those  acting  as  such,  of  the 
various  branch  mints,  all  collectors  of  the  customs,  all 
surveyors  of  the  customs  acting  also  as  collectors,  all 
assistant  treasurers,  all  receivers  of  public  moneys  at  the 
several  land  offices,  all  postmasters,  and  all  public  officers 
of  whatsoever  character  be,  and  they  are  hereby,  required 
to  keep  safely,  without  loaning,  using,  depositing  in  banks, 
or  exchanging  for  other  funds  than  as  allowed  by  this  act, 
all  the  public  money  collected  by  them,  or  otherwise  at  any 
time  placed  in  their  possession  and  custody,  till  the  same  is 
ordered  by  the  proper  department  or  officer  of  the  Govern- 
ment to  be  transferred  or  paid  out ;  and  when  such  orders 
for  transfer  or  payment  are  received,  faithfully  and 
promptly  to  make  the  same  as  directed,  and  to  do  and 
perform  all  other  duties  as  fiscal  agents  of  the  Government 
which  may  be  imposed  by  this  or  any  other  acts  of  Con- 
gress, or  by  any  regulation  of  the  Treasury  Department 
made  in  conformity  to  law ;  and,  also,  to  do  and  perform  all 
acts  and  duties  required  by  law,  or  by  direction  of  any  of 

41969°— lO- 22  337 


National     Monetary     Commission 

the  Executive  Departments  of  the  Government,  as  agents 
for  paying  pensions,  or  for  making  any  other  disburse- 
ments which  either  of  the  heads  of  those  departments  may 
be  required  by  law  to  make,  and  which  are  of  a  character 
to  be  made  by  the  depositaries  hereby  constituted,  con- 
sistently with  the  official  duties  imposed  upon  them. 

Sec.  7.  And  he  it  further  enacted,  That  the  Treasurer  of 
the  United  States,  the  treasurer  of  the  mint  of  the  United 
States,  the  treasurer  of  the  branch  mint  at  New  Orleans, 
and  all  the  assistant  treasurers  hereinbefore  directed  to  be 
appointed,  shall  respectively  give  bonds  to  the  United 
States  faithfully  to  discharge  the  duties  of  their  respective 
offices  according  to  law  and  for  such  amounts  as  shall  be 
directed  by  the  Secretary  of  the  Treasury,  with  sureties 
to  the  satisfaction  of  the  Solicitor  of  the  Treasury;  and 
shall,  from  time  to  time,  renew,  strengthen,  and  increase 
their  official  bonds,  as  the  Secretary  of  the  Treasury  may 
direct,  any  law  in  reference  to  any  of  the  official  bonds  of 
any  of  the  said  officers  to  the  contrary  notwithstanding. 

Sec.  8.  And  be  it  further  enacted,  That  it  shall  be  the 
duty  of  the  Secretary  of  the  Treasury,  at  as  early  a  date  as 
possible  after  the  passage  of  this  act,  to  require  the  several 
depositaries  hereby  constituted,  and  whose  official  bonds 
are  not  hereinbefore  provided  for,  to  execute  bonds,  new 
and  suitable  in  their  terms,  to  meet  the  new  and  increased 
duties  imposed  upon  them,  respectively,  by  this  act,  and 
with  sureties  and  in  sums  such  as  shall  seem  reasonable  and 
safe  to  the  Solicitor  of  the  Treasury;  and,  from  time  to 
time,  to  require  such  bonds  to  be  renewed  and  increased  in 
amount,  and  strengthened  by  new  sureties,  to  meet  any 
increasing  responsibility  which  may  grow  out  of  accumula- 

33« 


Independent   Treasury  of  the    United   States 

tions  of  money  in  the  hands  of  the  depositary,  or  out  of  any 
other  duty  or  responsibiUty  arising  under  this  or  any  other 
law  of  Congress. 

Sec.  9.  Atidhe  it  further  enacted,  That  all  collectors  and 
receivers  of  public  money,  of  every  character  and  descrip- 
tion, within  the  District  of  Columbia,  shall,  as  frequently 
as  they  may  be  directed  by  the  Secretary  of  the  Treasury 
or  the  Postmaster-General  so  to  do,  pay  over  to  the  Treas- 
urer of  the  United  States,  at  the  Treasury,  all  the  public 
moneys  collected  by  them  or  in  their  hands ;  that  all  such 
collectors  and  receivers  of  public  moneys  within  the  cities 
of  Philadelphia  and  New  Orleans  shall,  upon  the  same 
direction,  pay  over  to  the  treasurers  of  the  mints  in  their 
respective  cities,  at  the  said  mints,  all  public  moneys  col- 
lected by  them  or  in  their  hands;  and  that  all  such  collect- 
ors and  receivers  of  public  moneys  within  the  cities  of  New 
York,  Boston,  Charleston,  and  St.  Louis  shall,  upon  the 
same  direction,  pay  over  to  the  assistant  treasurers  in  their 
respective  cities,  at  their  offices,  respectively,  all  the  public 
moneys  collected  by  them  or  in  their  hands,  to  be  safely 
kept  by  the  said  respective  depositaries  until  otherwise 
disposed  of  according  to  law;  and  it  shall  be  the  duty  of 
said  Secretary  and  Postmaster-General,  respectively,  to 
direct  such  payments  by  the  said  collectors  and  receivers 
at  all  the  said  places  at  least  as  often  as  once  in  each  week, 
and  as  much  more  frequently,  and  in  all  cases,  as  they  in 
their  discretion  may  think  proper. 

Sec.  10.  Ayid  he  it  further  enacted,  That  it  shall  be  lawful 
for  the  Secretary  of  the  Treasury  to  transfer  the  moneys 
in  the  hands  of  any  depositary  hereby  constituted  to  the 
Treasury  of  the  United  States,  to  be  there  safely  kept,  to 

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the  credit  of  the  Treasurer  of  the  United  States,  according 
to  the  provisions  of  this  act,  to  any  other  depositary  con- 
stituted by  the  same,  at  his  discretion,  and  as  the  safety 
of  the  pubUc  moneys  and  the  convenience  of  the  pubhc 
service  shall  seem  to  him  to  require;  which  authority  to 
transfer  the  moneys  belonging  to  the  Post-Office  Depart- 
ment is  also  hereby  conferred  upon  the  Postmaster-General 
so  far  as  its  exercise  by  him  may  be  consistent  with  the 
provisions  of  existing  laws,  and  every  depositary  consti- 
tuted by  this  act  shall  keep  his  account  of  the  money  paid 
to  or  deposited  with  him,  belonging  to  the  Post-Office  De- 
partment, separate  and  distinct  from  the  account  kept  by 
him  of  other  public  moneys  so  paid  or  deposited.  And  for 
the  purpose  of  payments  on  the  public  account,  it  shall  be 
lawful  for  the  Treasurer  of  the  United  States  to  draw  upon 
any  of  the  said  depositaries,  as  he  may  think  most  con- 
ducive to  the  public  interests,  or  the  convenience  of  the 
pubhc  creditors,  or  both;  and  each  depositary  so  drawn 
upon  shall  make  returns  to  the  Treasury  and  Post-Office 
Department  of  all  moneys  received  and  paid  by  him  at 
such  times  and  in  such  form  as  shall  be  directed  by  the 
Secretary  of  the  Treasury  or  the  Postmaster-General. 

Sec.  II.  And  be  it  further  enacted,  That  the  Secretary  of 
the  Treasury  shall  be,  and  he  is  hereby,  authorized  to  cause 
examinations  to  be  made  of  the  books,  accounts,  and 
money  on  hand  of  the  several  depositaries  constituted  by 
this  act ;  and  for  that  purpose  to  appoint  special  agents,  as 
occasion  may  require,  with  such  compensation,  not  ex- 
ceeding six  dollars  per  day  and  travehng  expenses,  as  he 
may  think  reasonable,  to  be  fixed  and  declared  at  the 
time  of  each  appointment.     The  agents  selected  to  make 

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Independent   Treasury  of  the   United   States 

these  examinations  shall  be  instructed  to  examine  as  well 
the  books,  accounts,  and  returns  of  the  officer,  as  the  money 
on  hand,  and  the  manner  of  its  being  kept,  to  the  end  that 
uniformity  and  accuracy  in  the  accounts,  as  well  as  safety 
to  the  public  moneys,  may  be  secured  thereby. 

Sec.  12.  And  be  it  further  enacted,  That  in  addition  to  the 
examinations  provided  for  in  the  last  preceding  section, 
and  as  a  further  guard  over  the  public  moneys,  it  shall  be 
the  duty  of  each  naval  officer  and  surveyor,  as  a  check  upon 
the  assistant  treasurers,  or  the  collectors  of  the  customs,  of 
their  respective  districts ;  of  each  register  of  a  land  office,  as 
a  check  upon  the  receiver  of  his  land  office;  and  of  the 
director  and  superintendent  of  each  mint  and  branch  mint, 
when  separate  officers,  as  a  check  upon  the  treasurers,  re- 
spectively, of  the  said  mints,  or  the  persons  acting  as  such, 
at  the  close  of  each  quarter  of  the  year,  and  as  much  more 
frequently  as  they  shall  be  directed  by  the  Secretary  of  the 
Treasury  to  do  so;  to  examine  the  books,  accounts,  returns, 
and  money  on  hand  of  the  assistant  treasurers,  collectors, 
receivers  of  land  offices,  treasurers  of  the  mint,  and  each 
branch  mint,  and  persons  acting  as  such;  and  to  make  a 
full,  accurate,  and  faithful  return  to  the  Treasury  Depart- 
ment of  their  condition. 

Sec.  13.  And  be  it  further  enacted,  That  the  said  officers, 
respectively,  whose  duty  it  is  made  by  this  act  to  receive, 
keep,  and  disburse  the  public  moneys,  as  the  fiscal  agents 
of  the  Government,  may  be  allowed  any  necessary  addi- 
tional expense  for  clerks,  fireproof  chests  or  vaults,  or 
other  necessary  expenses  of  safe-keeping,  transferring,  and 
disbursing  said  moneys ;  all  such  expense  of  every  character 
to  be  first  expressly  authorized  by  the  Secretary  of  the 

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Treasury,  whose  directions  upon  all  the  above  subjects,  by 
way  of  regulation  and  otherwise,  so  far  as  authorized  by 
law,  are  to  be  strictly  followed  by  all  the  said  officers :  Pro- 
vided, That  the  whole  number  of  clerks  to  be  appointed  by 
virtue  of  this  section  of  this  act  shall  not  exceed  ten;  and 
that  the  aggregate  compensations  of  the  whole  number 
shall  not  exceed  eight  thousand  dollars ;  nor  shall  the  com- 
pensation of  any  one  clerk  so  appointed  exceed  eight 
hundred  dollars  per  annum. 

Sec.  14.  And  be  it  further  enacted,  That  the  Secretary  of 
the  Treasury  may,  at  his  discretion,  transfer  the  balances 
remaining  with  any  of  the  present  depositaries,  to  any 
other  of  the  present  depositaries,  as  he  may  deem  the  safety 
of  the  public  money  or  the  public  convenience  may  require  • 
Provided,  That  nothing  in  this  act  shall  be  so  construed  as 
to  authorize  the  Secretary  of  the  Treasury  to  transfer  the 
balances  remaining  with  any  of  the  present  depositaries  to 
the  depositaries  constituted  by  this  act  before  the  first  day 
of  January  next:  And  provided,  That  for  the  purpose  of 
payments  on  public  account,  out  of  balances  remaining 
with  the  present  depositaries,  it  shall  be  lawful  for  the 
Treasurer  of  the  United  States  to  draw  upon  any  of  the 
said  depositaries,  as  he  may  think  most  conducive  to  the 
public  interests,  or  to  the  convenience  of  public  creditors, 
or  both. 

Sec.  15.  And  be  it  further  enacted,  That  all  marshals, 
district  attorneys,  and  others  having  public  money  to  pay 
to  the  United  States,  and  all  patentees  wishing  to  make 
payment  for  patents  to  be  issued,  may  pay  all  such  moneys 
to  the  Treasurer  of  the  United  States,  to  the  treasurer  of 
either  of  the  mints  in  Philadelphia  or   New  Orleans,  to 

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Independent   Treasury  of  the   United   States 

either  of  the  other  assistant  treasurers,  or  to  such  other 
depositary  constituted  by  this  act  as  shall  be  designated 
by  the  Secretary  of  the  Treasury  in  other  parts  of  the 
United  States,  to  receive  such  payments  and  give  receipts 
or  certificates  of  deposit  therefor. 

Sec,  1 6.  Ayid  be  it  further  enacted,  That  all  officers  and 
other  persons  charged  by  this  act,  or  any  other  act,  with 
the  safe-keeping,  transfer,  and  disbursement  of  the  public 
moneys,  other  than  those  connected  with  the  Post-Office 
Department,  are  hereby  required  to  keep  an  accurate 
entry  of  each  sum  received,  and  each  payment  or  transfer; 
and  that  if  any  one  of  the  said  officers  or  those  connected 
with  the  Post-Office  Department  shall  convert  to  his  own 
use  in  any  way  whatever,  or  shall  use,  by  way  of  invest- 
ment in  any  kind  of  property  or  merchandise,  or  shall  loan, 
with  or  without  interest,  or  shall  deposit  in  any  bank,  or 
shall  exchange  for  other  funds  except  as  allowed  by  this 
act,  any  portion  of  the  public  moneys  intrusted  to  him  for 
safe-keeping,  disbursement,  transfer,  or  for  any  other  pur- 
pose, every  such  act  shall  be  deemed  and  adjudged  to  be 
an  embezzlement  of  so  much  of  the  said  moneys  as  shall 
be  thus  taken,  converted,  invested,  used,  loaned,  depos- 
ited, or  exchanged,  which  is  hereby  declared  to  be  a  felony; 
and  any  failure  to  pay  over  or  to  produce  the  public  moneys 
intrusted  to  such  person  shall  be  held  and  taken  to  be 
prima  facie  evidence  of  such  embezzlement,  and  if  any 
officer  charged  with  the  disbursements  of  public  money 
shall  accept  or  receive,  or  transmit  to  the  Treasury  Depart- 
ment to  be  allowed  in  his  favor,  any  receipt  or  voucher 
from  a  creditor  of  the  United  States  without  having  paid  to 
such  creditor  in  such  funds  as  the  said  officer  may  have 

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National     Monetary     Commission 

received  for  disbursement,  or  such  funds  as  he  may  be 
authorized  by  this  act  to  take  in  exchange,  the  full  amount 
specified  in  this  receipt  or  voucher,  every  such  act  shall 
be  deemed  to  be  a  conversion  by  such  officer  to  his  own 
use  of  the  amount  specified  in  such  receipt  or  voucher; 
and  any  officer  or  agent  of  the  United  States,  and  all  per- 
sons advising  or  participating  in  such  act,  being  convicted 
thereof  before  any  court  of  the  United  States  of  compe- 
tent jurisdiction,  shall  be  sentenced  to  imprisonment  for 
a  term  of  not  less  than  six  months  nor  more  than  ten  years, 
and  to  a  fine  equal  to  the  amount  of  the  money  embezzled. 
And  upon  the  trial  of  any  indictment  against  any  person 
for  embezzling  public  money  under  the  provisions  of  this 
act,  it  shall  be  sufficient  evidence,  for  the  purpose  of  show- 
ing a  balance  against  such  person,  to  produce  a  transcript 
from  the  books  and  proceedings  of  the  Treasury,  as  re- 
quired in  civil  cases,  under  provisions  of  the  act  entitled 
' '  An  act  to  provide  more  effectually  for  the  settlement  of 
accounts  between  the  United  States  and  receivers  of  public 
money,"  approved  March  third,  seventeen  hundred  and 
ninety-seven;  and  the  provisions  of  this  act  shall  be 
so  construed  as  to  apply  to  all  persons  charged  with 
the  safe-keeping,  transfer,  or  disbursement  of  the  public 
money,  w^hether  such  persons  be  indicted  as  receivers  or 
depositaries  of  the  same;  and  the  refusal  of  such  person, 
whether  in  or  out  of  office,  to  pay  any  draft,  order,  or 
warrant,  which  may  be  drawn  upon  him  by  the  proper 
officer  of  the  Treasury  Department,  for  any  public  money 
in  his  hands  belonging  to  the  United  States,  no  matter  in 
what  capacity  the  same  may  have  been  received  or  may 
be    held,    or   to    transfer   or    disburse    any    such   money 

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Independent   Treasury  of  the    United   States 

promptly,  upon  the  legal  requirement  of  any  authorized 
officer  of  the  United  States,  shall  be  deemed  and  taken, 
upon  the  trial  of  any  indictment  against  such  person  for 
embezzlement,  as  prima  facie  evidence-  of  such  embez- 
zlement 

Sec.  17.  And  be  it  further  enacted,  That  until  the  rooms, 
offices,  vaults,  and  safes,  directed  by  the  first  four  sections 
of  this  act  to  be  constructed  and  prepared  for  the  use  of  the 
Treasurer  of  the  United  States,  the  treasurers  of  the  mints 
at  Philadelphia  and  New  Orleans,  and  the  assistant  treas- 
urers at  New  York,  Boston,  Charleston,  and  St.  Louis,  can 
be  constructed  and  prepared  for  use,  it  shall  be  the  duty  of 
the  Secretary  of  the  Treasury  to  procure  suitable  rooms  for 
offices  for  those  officers  at  their  respective  locations,  and 
to  contract  for  such  use  of  vaults  and  safes  as  may  be  re- 
quired for  the  safe-keeping  of  the  public  moneys  in  the 
charge  and  custody  of  those  officers,  respectively,  the 
expenses  to  be  paid  by  the  United  States. 

And  whereas  by  the  thirteenth  section  of  the  act  enti- 
tled, "An  act  to  regulate  the  collection  of  duties  imposed 
by  law  on  the  tonnage  of  ships  or  vessels,  and  on  goods, 
wares,  and  merchandises  imported  into  the  United  States," 
approved  July  thirty-one,  seventeen  hundred  and  eighty- 
nine,  it  was  provided  that  all  fees  and  dues  collected  by 
virtue  of  that  act  should  be  received  in  gold  and  silver  coin 
only;  and  whereas,  also,  by  the  fifth  section  of  the  act 
approved  May  ten,  eighteen  hundred,  entitled,  "An  act 
to  amend  the  act  entitled,  'An  act  providing  for  the  sale 
of  the  lands  of  the  United  States  in  the  territory  north- 
west of  the  Ohio  and  above  the  mouth  of  Kentucky  River,'  " 
it  was  provided  that  payment  for  the  said  lands  shall  be 

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National     Monetary     Commission 

made  by  all  purchasers  in  specie,  or  in  evidences  of  the 
public  debt ;  and  whereas  experience  has  proved  that  said 
provisions  ought  to  be  revived  and  enforced,  according  to 
the  true  and  wise  intent  of  the  Constitution  of  the  United 
States : 

Sec.  1 8.  Be  it  further  enacted,  That  on  the  first  day  of 
January,  in  the  year  one  thousand  eight  hundred  and  forty- 
seven,  and  thereafter,  all  duties,  taxes,  sales  of  public 
lands,  debts,  and  sums  of  money  accruing  or  becoming 
due  to  the  United  States,  and  also  all  sums  due  for  post- 
ages, or  otherwise,  to  the  General  Post-Office  Depart- 
ment, shall  be  paid  in  gold  and  silver  coin  only,  or  in 
treasury  notes  issued  under  the  authority  of  the  United 
States :  Provided,  That  the  Secretary  of  the  Treasury  shall 
publish  monthly,  in  two  newspapers  at  the  city  of  Wash- 
ington, the  amount  of  specie  at  the  several  places  of 
deposit,  the  amount  of  treasury  notes  or  drafts  issued, 
and  the  amount  outstanding  on  the  last  day  of  each  month. 

Sec.  19.  And  be  it  further  enacted.  That  on  the  first  day 
of  April,  one  thousand  eight  hundred  and  forty-seven, 
and  thereafter,  every  officer  or  agent  engaged  in  making 
disbursements  on  account  of  the  United  States,  or  of  the 
General  Post-Office,  shall  make  all  payments  in  gold  and 
silver  coin  or  in  treasury  notes,  if  the  creditor  agree  to 
receive  said  notes  in  payment;  and  any  receiving  or 
disbursing  officer  or  agent  who  shall  neglect,  evade,  or 
violate,  the  provisions  of  this  and  the  last  preceding 
section  of  this  act,  shall,  by  the  Secretary  of  the  Treasury, 
be  immediately  reported  to  the  President  of  the  United 
States,  with  the  facts  of  such  neglect,  evasion,  or  violation; 
and  also  to  Congress,  if  in  session,  and  if  not  in  session, 

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Independent   Treasury  of  the    United   States 

at  the  commencement  of  its  session  next  after  the  viola- 
tion takes  place. 

Sec.  20.  And  he  it  further  enacted,  That  no  exchange  of 
funds  shall  be  made  by  any  disbursing  officers  or  agents 
of  the  Government,  of  any  grade  or  denomination  what- 
soever, or  connected  with  any  branch  of  the  pubhc  service, 
other  than  an  exchange  for  gold  and  silver;  and  every 
such  disbursing  officer,  when  the  means  for  his  disburse- 
ments are  furnished  to  him  in  gold  and  silver,  shall  make 
his  payments  in  the  money  so  furnished;  or  when  those 
means  are  furnished  to  him  in  drafts,  shall  cause  those 
drafts  to  be  presented  at  their  place  of  payment,  and 
properly  paid,  according  to  the  law;  and  shall  make  his 
payments  in  the  money  so  received  for  the  drafts  fur- 
nished, unless,  in  either  case,  he  can  exchange  the  means 
in  liis  hands  for  gold  and  silver  at  par.  And  it  shall  be, 
and  is  hereby,  made  the  duty  of  the  head  of  the  proper 
department  immediately  to  suspend  from  duty  any  dis- 
bursing officer  who  shall  violate  the  provisions  of  this 
section,  and  forthwith  to  report  the  name  of  the  officer 
or  agent  to  the  President,  with  the  fact  of  the  violation, 
and  all  the  circumstances  accompanying  the  same  and 
within  the  knowledge  of  the  said  Secretary,  to  the  end 
that  such  officer  or  agent  may  be  promptly  removed  from 
office  or  restored  to  his  trust  and  the  performance  of  his 
duties,  as  to  the  President  may  seem  just  and  proper: 
Provided,  however,  That  those  disbursing  officers  having 
at  present  credits  in  the  banks,  shall,  until  the  first  day  of 
January  next,  be  allowed  to  check  on  the  same,  allowing 
the  public  creditors  to  receive  their  pay  from  the  ba:iks 
either  in  specie  or  bank  notes. 

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National     Monetary     Commission 

Sec.  21.  And  he  it  further  enacted,  That  it  shall  be  the 
duty  of  the  Secretary  of  the  Treasury  to  issue  and  publish 
regulations  to  enforce  the  speedy  presentation  of  all 
government  drafts  for  payment  at  the  place  where  pay- 
able, and  to  prescribe  the  time,  according  to  the  different 
distances  of  the  depositaries  from  the  seat  of  Government, 
within  which  all  drafts  upon  them,  respectively,  shall  be 
presented  for  payment;  and  in  default  of  such  presenta- 
tion, to  direct  any  other  mode  and  place  of  payment 
which  he  may  deem  proper;  but  in  all  these  regulations 
and  directions  it  shall  be  the  duty  of  the  Secretary  of  the 
Treasury,  to  guard  as  far  as  may  be,  against  those  drafts 
being  used  or  thrown  into  circulation  as  a  paper  currency, 
or  medium  of  exchange.  And  no  officer  of  the  United 
States  shall,  either  directly  or  indirectly,  Sell  or  dispose 
to  any  person  or  persons,  or  corporations,  whatsoever, 
for  a  premium,  any  treasury  note,  draft,  warrant,  or 
other  public  security,  not  his  private  property,  or  sell  or 
dispose  of  the  avails  or  proceeds  of  such  note,  draft, 
warrant,  or  security,  in  his  hands  for  disbursement,  with- 
out making  return  of  such  premium,  and  accounting 
therefor  by  charging  the  same  in  his  accounts  to  the  credit 
of  the  United  States ;  and  any  officer  violating  this  section 
shall  be  forthwith  dismissed  from  office. 

Sec.  22.  And  he  it  further  enacted,  That  the  assistant 
treasurers  directed  by  this  act  to  be  appointed  shall  re- 
ceive, respectively,  the  following  salaries  per  annum,  to 
be  paid  quarter-yearly  at  the  Treasury  of  the  United 
States,  to  wit:  The  assistant  treasurer  at  New  York  shall 
be  paid  a  salary  of  four  thousand  dollars  per  annum;  the 


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Independent   Treasury  of  the   United  States 

assistant  treasurer  at  Boston  shall  be  paid  a  salary  of 
two  thousand  five  hundred  dollars  per  annum;  the  assist- 
ant treasurer  at  Charleston  shall  be  paid  a  salary  of  two 
thousand  five  hundred  dollars  per  annum;  the  assistant 
treasurer  at  St.  Louis  shall  be  paid  a  salary  of  two  thou- 
sand five  hundred  dollars  per  annum ;  the  treasurer  of  the 
mint  at  Philadelphia  shall,  in  addition  to  his  present  salary, 
receive  five  hundred  dollars  annually  for  the  perform.ance 
of  the  duties  imposed  by  this  act;  the  treasurer  of  the 
branch  mint  at  New  Orleans  shall  also  receive  five  hun- 
dred dollars  annually  for  the  additional  duties  created  by 
this  act;  and  these  salaries,  respectively,  shall  be  in  full 
for  the  services  of  the  respective  officers,  nor  shall  either 
of  them  be  permitted  to  charge  or  receive  any  commis- 
sion, pay,  or  perquisite  for  any  official  service  of  any 
character  or  description  whatsoever;  and  the  making  of 
any  such  charge,  or  the  receipt  of  any  such  compensation, 
is  hereby  declared  to  be  a  misdemeanor,  for  which  the 
officer,  convicted  thereof  before  any  court  of  the  United 
States  of  competent  jurisdiction,  shall  be  subject  to  pun- 
ishment by  fine  or  imprisonment,  or  both,  at  the  discre- 
tion of  the  court  before  which  the  offense  shall  be  tried. 

Sec.  23.  A7id  he  it  further  enacted,  That  there  shall  be, 
and  hereby  is,  appropriated,  to  be  paid  out  of  any  money 
in  the  Treasury  not  otherwise  appropriated,  the  sum  of 
five  thousand  dollars,  to  be  expended,  under  the  direc- 
tion of  the  Secretary  of  the  Treasury,  in  such  repairs  or 
additions  as  may  be  necessary  to  put  in  good  condition 
for  use,  with  as  little  delay  as  may  be  consistent  with  the 
public  interests,  the  offices,  rooms,  vaults,  and  safes  herein 


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National     Monetary     Commission 

mentioned,  and  in  the  purchase  of  any  necessary  addi- 
tional furniture  and  fixtures,  in  the  purchase  of  necessary 
books  and  stationery,  and  in  defraying  any  other  inci- 
dental expenses  necessary  to  carry  this  act  into  effect. 

Sec.  24.  And  he  it  further  enacted,  That  all  acts  or  parts 
of  acts  which  come  in  conflict  with  the  provisions  of  this 
act  be,  and  the  same  are  hereby,  repealed. 

Approved,  August  6,  1846. 

AMENDMENTS   TO   SUBTREASURY   ACT. 
(March  3.  1857.) 

Section  i.  Be  it  enacted,  etc.,  That  the  act  to  provide 
for  the  better  organization  of  the  Treasury,  and  for  the 
collection,  safe-keeping,  transfer,  and  disbursement  of 
the  public  revenue,  approved  August  sixth,  eighteen 
hundred  and  forty-six,  be,  and  the  same  is  hereby  so 
amended  that  each  and  every  disbursing  officer  or  agent 
of  the  United  States,  having  any  money  of  the  United 
States  intrusted  to  him  for  disbursement,  shall  be,  and  he 
is  hereby  required  to  deposit  the  same  with  the  Treasurer 
of  the  United  States,  or  with  some  one  of  the  assistant 
treasurers  or  pubHc  depositaries,  and  draw  for  the  same 
only  in  favor  of  the  persons  to  whom  payment  is  to  be 
made  in  pursuance  of  law  and  instructions;  except  when 
payments  are  to  be  made  in  sums  under  twenty  dollars, 
in  which  cases  such  disbursing  agent  may  check  in  his 
own  name,  stating  that  it  is  to  pay  small  claims. 

Sec.  2.  And  he  it  further  enacted.  That  the  Treasurer  of 
the  United  States,  assistant  treasurers,  and  public  deposi- 
taries shall  safely  keep  all  moneys  deposited  by  any  dis- 


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Independent   Treasury  of  the   United  States 

bursing  officer  or  disbursing  agent  of  the  United  States, 
as  well  as  any  moneys  deposited  by  any  receiver,  collector, 
or  other  person  which  shall  be  the  moneys  of,  or  due,  or 
owing  to  the  United  States,  and  for  a  failure  so  to  do 
shall  be  held  guilty  of  the  crime  of  embezzlement  of  said 
moneys,  and  subject  to  the  punishment  provided  for  em- 
bezzlement in  the  act  to  which  this  is  an  amendment. 

Sec.  3.  And  he  it  further  enacted,  That  it  shall  be  the 
duty  of  each  and  every  person  who  shall  have  moneys  of 
the  United  States  in  his  hands  or  possession  to  pay  the 
same  to  the  Treasurer,  the  assistant  treasurer,  or  a  public 
depositary  of  the  United  States,  and  take  his  receipt  for 
the  same,  in  duplicate,  and  forward  one  of  them  forth- 
with to  the  Secretary  of  the  Treasury,  and  for  a  failure 
to  make  such  deposit,  when  required  by  the  Secretary  of 
the  Treasury,  or  any  other  department,  or  the  accounting 
officers  of  the  Treasury,  the  person  so  failing  shall  be 
held  guilty  of  the  crime  of  embezzlement,  and  subject  to 
the  punishment  for  that  offense  provided  in  the  act  to 
which  this  is  an  amendment. 

DEPOSITARIES. 

(Section  32 11  of  the  Revised  Statutes.) 

The  Secretary  of  the  Treasury  is  authorized  to  designate 
one  or  more  depositaries  in  each  State  for  the  deposit 
and  safe-keeping  of  the  money  collected  by  virtue  of  the 
internal-revenue  laws;  and  the  receipts  of  the  proper 
officers  of  such  depositary  to  a  collector  for  the  money 
deposited  by  him  shall  be  a  sufficient  voucher  for  such 
collector  in  the  settlement  of  his  accounts  at  the  Treasury 
Department. 

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National     Monetary     Commission 

DEPOSIT   OF   POSTMASTERS. 

(Section  3847  of  the  Revised  Statutes.) 

Any  postmaster,  having  public  money  belonging  to  the 
Government,  at  an  office  within  a  comity  where  there  are 
no  designated  depositaries,  treasurers  of  mints,  or  Treas- 
urer, or  assistant  treasurers  of  the  United  States,  may 
deposit  the  same  at  his  own  risk  and  in  his  official  capacity, 
in  any  national  bank  in  the  town,  city,  or  county  where 
the  said  postmaster  resides,  etc.  [The  remainder  of  the 
section  forbids  taking  interest,  etc.] 

TRANSFERS    OF    POST-OFFICE   MONEY. 
(Section  3641  of  the  Revised  Statutes.) 

The  Postmaster-General  may  transfer  money  belonging 
to  the  postal  service  between  the  Treasurer,  assistant 
treasurers,  and  designated  depositaries,  at  his  discretion, 
and  as  the  safety  of  the  public  money  and  the  convenience 
of  the  service  may  require. 

DISBURSING    OFFICERS. 

(Section  3620  of  the  Revised  Statutes.) 

It  shall  be  the  duty  of  every  disbursing  officer  having 
any  public  money  intrusted  to  nim  for  disbursement,  to 
deposit  the  same  with  the  Treasurer  or  some  one  of  the 
assistant  treasurers  of  the  United  States,  and  to  draw 
for  the  same  only  as  it  may  be  required  for  payments  to 
be  made  by  him  in  pursuance  of  law  (and  draw  for  the 
same  only  in  favor  of  the  persons  to  whom  payment  is 
made) ;  and  all  transfers  from  the  Treasurer  of  the  United 
States  to  a  disbursing  officer  shall  be  by  draft  or  warrant 
on  the  Treasury  or  an  assistant  treasurer  of  the  United 

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Independent   Treasury  of  the   United  States 

States.  In  places,  however,  where  there  is  no  treasurer 
or  assistant  treasurer,  the  Secretary  of  the  Treasury  may, 
when  he  deems  it  essential  to  the  public  interest,  specially 
authorize  in  writing  the  deposit  of  such  public  money  in 
any  other  public  depositary,  or,  in  writing,  authorize 
the  same  to  be  kept  in  any  other  manner,  and  under  such 
rules  and  regulations  as  he  may  deem  most  safe  and 
effectual  to  facilitate  the  payments  to  public  creditors. 

ACCOUNTS. 
(Section  3622  of  the  Revised  Statutes.) 

Every  officer  or  agent  of  the  United  States  who  receives 
public  money  which  he  is  not  authorized  to  retain  as  sal- 
ary, pay,  or  emolument,  shall  render  his  accounts  monthly. 
Such  accounts,  with  the  vouchers  necessary  to  the  correct 
and  prompt  settlement  thereof,  shall  be  sent  by  mail,  or 
otherwise,  to  the  bureau  to  which  they  pertain,  within 
ten  days  after  the  expiration  of  each  successive  month, 
and,  after  examination  there,  shall  be  passed  to  the  proper 
accounting  officer  of  the  Treasury  for  settlement.  Dis- 
bursing officers  of  the  navy  shall,  however,  render  their 
accounts  and  vouchers  direct  to  the  proper  accounting 
officer  of  the  Treasury.  In  case  of  the  nonreceipt  at  the 
Treasury,  or  proper  bureau,  of  any  accounts  within  a 
reasonable  and  proper  time  thereafter,  the  officer  whose 
accounts  are  in  default  shall  be  required  to  furnish  satis- 
factory evidence  of  having  complied  with  the  provisions 
of  this  section.  The  Secretary  of  the  Treasury  may,  if 
in  his  opinion  the  circumstances  of  the  case  justify  and 
require  it,  extend  the  time  hereinbefore  prescribed  for 
the  rendition  of  accounts.  Nothing  herein  contained 
41969°— 10 23  353 


National     Monetary     Commission 

shall,  however,  be  construed  to  restrain  the  heads  of  any 
of  the  departments  from  requiring  such  other  returns  or 
reports  from  the  officer  or  agent,  subject  to  the  control 
of  such  heads  of  departments  as  the  public  interest  may 
require. 

NATIONAL   BANK   DEPOSITARIES. 

(Section  5153   of   the  Revised  Statutes,   act  June  3,    1864,   as  amended 
March  3,  1901,  and  March  4,  1907.) 

All  national  banking  associations,  designated  for  that 
purpose  by  the  Secretary  of  the  Treasury,  shall  be  depos- 
itaries of  public  money,  under  such  regulations  as  may 
be  prescribed  by  the  Secretary;  and  they  may  also  be 
employed  as  financial  agents  of  the  Government;  and 
they  shall  perform  all  such  reasonable  duties,  as  deposita- 
ries of  public  money  and  financial  agents  of  the  Govern- 
ment, as  may  be  required  of  them.  The  Secretary  of  the 
Treasury  shall  require  the  associations  thus  designated  to 
give  satisfactory  security,  by  the  deposit  of  United  States 
bonds  and  otherwise,  for  the  safe-keeping  and  prompt 
payment  of  the  public  money  deposited  with  them,  and 
for  the  faithful  performance  of  their  duties  as  financial 
agents  of  the  Government:  Provided,  That  the  Secretary 
shall,  on  or  before  the  first  January  of  each  year,  make  a 
public  statement  of  the  securities  required  during  that 
year  for  such  deposits.  And  every  association  so  desig- 
nated as  receiver  or  depositary  of  the  public  money  shall 
take  and  receive  at  par  all  of  the  national  currency  bills, 
by  whatever  association  issued,  which  have  been  paid 
into  the  Government  for  internal  revenue,  or  for  loans 
or  stocks:  Provided,  That  the  Secretary  of  the  Treasury 
shall  distribute  the  deposits  herein  provided  for,  as  far  as 

354 


Independent   Treasury  of  the   United   States 

practicable,  equitably  between  the  different  States  and 
sections. 

INTEREST  ON  PUBUC   DEPOSITS. 

(Act  May  30,  1908.) 

That  all  national  banking  associations  designated  as 
regular  depositaries  of  public  money  shall  pay  upon  all 
special  and  additional  deposits  made  by  the  Secretary  of 
the  Treasury  in  such  depositaries,  and  all  such  associations 
designated  as  temporary  depositaries  of  public  money 
shall  pay  upon  all  sums  of  public  money  deposited  in  such 
associations  interest  at  such  rate  as  the  Secretary  of  the 
Treasury  may  prescribe,  not  less,  however,  than  one  per 
centum  per  annum  upon  the  average  monthly  amount 
of  such  deposits:  Provided,  however,  That  nothing  con- 
tained in  this  act  shall  be  construed  to  change  or  modify 
the  obligation  of  any  association  or  any  of  its  officers  for 
the  safe-keeping  of  public  money:  Provided  further,  That 
the  rate  of  interest  charged  upon  such  deposits  shall  be 
equal  and  uniform  throughout  the  United  States. 

PENALTY   FOR   UNAUTHORIZED   DEPOSIT   OF  PUBLIC   MONEY. 
(Act  June  14,  1866,  14  Stat.  L.,  64.) 

Every  disbursing  officer  of  the  United  States  who  de- 
posits any  public  money  intrusted  to  him  in  any  place  or 
in  any  manner  except  as  authorized  by  law,  or  converts  to 
his  own  use  in  any  way  whatever,  or  loans  with  or  without 
interest,  or  for  any  purpose  not  prescribed  by  law  with- 
draws from  the  Treasurer  or  any  assistant  treasurer,  or  any 
authorized  depositary,  or  for  any  purpose  not  prescribed 
by  law  transfers  or  appHes  any  portion  of  the  public  money 
intrusted  to  him,  is,  in  every  such  act,  deemed  guilty  of 

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National     Monetary     Commission 

an  embezzlement  of  the  money  so  deposited,  converted, 
loaned,  withdrawn,  transferred,  or  apphed;  and  shall  be 
punished  by  imprisonment  with  hard  labor  for  a  term  not 
less  than  one  year  nor  more  than  ten  years,  or  by  a  fine  of 
not  more  than  the  amount  embezzled  or  less  than  one 
thousand  dollars,  or  by  both  such  fine  and  imprisonment. 

PENALTY   FOR   UNAUTHORIZED  RECEIPT  OR   USE  OF  PUBUC 

MONEY. 

(Act  June  14,  1866,  14  Stat.  L.,  65,  as  amended  February  3,  1879.) 

Every  banker,  broker,  or  other  person  not  an  authorized 
depositary  of  public  moneys,  who  knowingly  receives  from 
any  disbursing  officer,  or  collector  of  internal  revenue,  or 
other  agent  of  the  United  States,  any  public  money  on  de- 
posit, or  by  way  of  loan  or  accommodation,  with  or  with- 
out interest,  or  otherwise  than  in  payment  of  a  debt 
against  the  United  States,  or  who  uses,  transfers,  con- 
verts, appropriates,  or  applies  any  portion  of  the  public 
money  for  any  purpose  not  prescribed  by  law,  and  every 
president,  cashier,  teller,  director,  or  other  officer  of  any 
bank  or  banking  association,  who  violates  any  of  the  pro- 
visions of  this  section,  is  guilty  of  an  act  of  embezzlement 
of  the  public  money  so  deposited,  loaned,  transferred, 
used,  converted,  appropriated,  or  applied,  and  shall  be 
punished  as  prescribed  in  section  fifty-four  hundred  and 
eighty-eight. 


356 


3- 
Issue  and  Redemption  of  Currency. 

Treasury  Department, 
Office  Treasurer  of  the  United  States, 

December  6,  igog. 
Department  Circular  No.  66. 
Treasurer's  Office,  No.  79. 
The  following  regulations  govern  the  issue  and  redemp- 
tion of  the  paper  currency  and  the  gold,  silver,  and  minor 
coin  of  the  United  States  and  the  redemption  of  national- 
bank  notes  by  the  Treasurer  of  the  United  States: 

I.  issue  of  united  states  paper  currency. 

1.  New  United  States  currency  is  sent  in  return  for 
United  States  currency  unfit  for  circulation,  national- 
bank  notes,  subsidiary  silver  coin,  or  minor  coin  received 
for  redemption. 

2.  Silver  certificates  are  issued  by  the  Treasurer  or  any 
assistant  treasurer  upon  a  deposit  of  standard  silver 
dollars. 

3.  Gold  certificates  are  issued  by  the  Treasurer  or  any 
assistant  treasurer  upon  a  deposit  of  gold  coin. 

II.    ISSUE   OF   GOLD   coin. 

4.  Gold  coin  is  issued  in  redemption  of  gold  certificates, 
United  States  notes,  and  Treasury  notes  of  1890,  by  the 
Treasurer  or  any  assistant  treasurer. 

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National     Monetary     Commission 

III.    ISSUE  OF   STANDARD   SIIvVER  DOLLARS   AND  SUBSIDIARY 
SILVER   COIN. 

5.  Standard  silver  dollars  are  issued  by  the  Treasurer 
or  any  assistant  treasurer  in  redemption  of  silver  certifi- 
cates or  Treasury  notes  of  1890,  and  will  be  sent  by  ex- 
press at  the  expense  of  the  consignee. 

6.  Subsidiary  silver  coin  is  issued  upon  a  deposit  of 
United  States  currency  or  national-bank  notes  with  the 
Treasurer  or  any  assistant  treasurer  or  national-bank 
depositary,  and  the  coin  will  be  sent  by  express  from  the 
nearest  subtreasury  at  the  expense  of  the  Government 
for  transportation,  or  by  registered  mail  at  the  risk  of  the 
consignee,  postage  and  registration  free.  Subsidiary 
silver  coin  is  also  issued  for  drafts  sent  to  the  Treasurer 
of  the  United  States  in  Washington  or  the  assistant  treas- 
urer in  New  York,  payable  in  their  respective  cities  to  the 
order  of  the  officer  to  whom  sent.  Drafts  on  New  York 
must  be  collectible  through  the  clearing  house,  and  should 
be  drawn  to  the  order  of  the  assistant  treasurer  of  the 
United  States,  New  York,  and  mailed  directly  to  that 
officer. 


358 


4- 

PuBivic   Moneys   and    Official  Checks  of  United 
States  Disbursing  Officers. 

Treasury  Department, 

Office  of  the  Secretary, 

December  7,  igo6. 
Department  Circular  No.  102. 
Division  of  Public  Moneys. 
In  accordance  with  the  provisions  of  the  above  sections, 
any  public  money  advanced  to  disbursing  officers  of  the 
United  States  must  be  deposited  immediately  to  their  re- 
spective credits,  with  either  the  United  States  Treasurer, 
some  assistant  treasurer,  or  by  special  direction  of  the 
Secretary  of  the  Treasury,  with  a  national-bank  depositary 
nearest  or  most  convenient,  except — 

1.  Any  disbursing  officer  of  the  War  Department,  spe- 
cially authorized  by  the  Secretary  of  War,  when  stationed 
on  the  extreme  frontier  or  at  places  far  remote  from  such 
depositaries,  may  keep,  at  his  own  risk,  such  moneys  as 
may  be  intrusted  to  him  for  disbursement. 

2.  Any  officer  receiving  money  remitted  to  him  upon 
specific  estimates  may  disburse  it  accordingly,  without 
waiting  to  place  it  in  a  depositary,  provided  the  payments 
are  due  and  he  prefers  this  method  to  that  of  drawing 
checks. 

Any  checks  drawn  by  a  disbursing  officer  upon  moneys 
thus  deposited  must  be  in  favor  of  the  party,  by  name,  to 
whom  the  payment  is  to  be  made,  and  payable  to  "  order," 

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National     Monetary     Commission 

with  these  exceptions:  (i)  To  make  payments  of  amounts 
not  exceeding  $20;  (2)  to  make  payments  at  a  distance 
from  a  depositary ;  and  (3)  to  make  payments  of  fixed  sala- 
ries due  at  a  certain  period;  in  either  of  which  cases  any 
disbursing  officer  may  draw  his  check  in  favor  of  himself, 
or  "  order,"  for  such  amount  as  may  be  necessary  for  such 
payment,  but  in  the  first  and  last  named  cases  the  check 
must  be  drawn  not  more  than  two  days  before  the  pay- 
ments become  due. 

Any  disbursing  officer  or  agent  drawing  checks  on 
moneys  deposited  to  his  official  credit  must  state  on  the 
face  or  back  of  each  check  the  object  or  purpose  to  which 
the  avails  are  to  be  applied,  except  upon  checks  issued  in 
payment  of  individual  pensions,  the  special  form  of  such 
checks  indicating  sufficiently  the  character  of  disburse- 
ment. If  the  object  or  purpose  for  which  any  check  of  a 
public  disbursing  officer  is  drawn  is  not  stated  thereon,  as 
required,  or  if  any  reason  exists  for  suspecting  fraud,  the 
office  or  bank  on  which  such  check  is  drawn  will  refuse  its 
payment. 

Such  statement  may  be  made  in  brief  form,  but  must 
clearly  indicate  the  object  of  the  expenditure,  as,  for  in- 
stance, "pay,"  "  pay  roU,"  or  "  payment  of  troops,"  adding 
the  fort  or  station,  "purchase  of  subsistence,"  or  other 
supplies;  "on  account  of  construction,"  mentioning  the 
fortification  or  other  public  work  for  which  the  payment  is 
made;  "payments  under  $20,"  etc. 

Any  check  drawn  by  a  United  States  disbursing  officer 
payable  to  himself,  or  "order,"  "to  make  payments  of 
amounts  not  exceeding  $20  each,"  under  the  provisions  of 


360 


Independent   Treasury  of  the   United  States 

this  circular  must  bear  indorsed  thereon  the  names  of  the 
persons  to  whom  the  amount  drawn  is  to  be  paid,  or  be 
accompanied  by  a  Ust  or  schedule,  made  a  part  of  the 
check,  containing  the  same  information. 

The  object  or  purpose  to  which  the  avails  are  to  be  ap- 
plied in  case  of  any  check  drawn  by  a  disbursing  officer  of 
the  army  for  an  amount  to  be  retained  in  his  possession  by 
authority  of  the  Secretary  of  War,  given  under  the  pro- 
visions of  this  circular,  or  by  any  disbursing  officer  given 
such  special  authority  by  the  Secretary  of  the  Treasury, 
under  the  provisions  of  section  3620,  Revised  Statutes  of 
the  United  States,  must  be  clearly  indicated  by  a  state- 
ment on  the  check  that  it  is  to  obtain  cash  to  hold  in  per- 
sonal possession,  and  date  of  authority  given  so  to  hold 
funds.  Checks  will  not  be  returned  to  the  drawer  after 
their  payment,  but  will  be  retained  by  the  depositary,  ar- 
ranged separately  by  officers  and  consecutively  by  number 
and  date  convenient  for  ready  reference,  as  they  are  liable 
to  be  called  for  by  the  department  at  any  time  as  evidence 
of  proper  payment.  The  depositary  will  furnish  each  dis- 
bursing officer  with  a  detailed  monthly  statement  of  his 
account. 

All  disbursing  clerks  and  agents  of  the  executive 
departments,  independent  offices,  and  commissions,  and 
offices  luider  and  part  of  the  executive  departments 
located  in  the  District  of  Columbia,  to  prevent  carrying 
unnecessary  balances  of  cash,  are  directed  to  deposit, 
on  or  before  the  5th  and  20th  of  each  month,  with  the 
Treasurer  of  the  United  States,  to  their  official  credit 
subject  to  check,  any  and  all  balances  of  cash  drawn 


361 


National     Mon  etary    Commission 

to  meet  pay  rolls  and  remaining  in  their  hands;  and 
thereafter,  mitil  the  next  regular  pay  day,  to  make  pay- 
ments appropriate  to  be  made  by  check  and  not  in  cash. 

Deposits  to  the  credit  of  the  Treasurer  of  the  United 
States  on  account  of  repayment  of  disbursing  funds  must 
be  made  with  the  office  or  bank  in  which  such  fimds  are 
to  the  credit  of  the  disbursing  officer.  Disbursing  officers 
are  not  authorized  to  transfer  funds  standing  to  their 
credit  with  one  depositary  to  their  credit  with  another 
depositary;  sucji  transfers  will  be  made  by  the  Secretary 
of  the  Treasury  upon  the  requests  of  the  heads  of  the 
departments  under  which  the  officers  are  serving. 

No  allowance  will  be  made  to  any  disbursing  officer 
for  expenses  charged  for  collecting  money  on  checks. 

Whenever  any  disbursing  officer  of  the  United  States 
shall  cease  to  act  in  that  capacity  he  will  at  once  inform 
the  Secretary  of  the  Treasury  whether  he  has  any  public 
funds  to  his  credit  in  any  office  or  bank,  and,  if  so,  what 
checks,  if  any,  he  has  drawn  against  the  same,  which 
are  still  outstanding  and  unpaid.  Until  satisfactory 
information  of  this  character  shall  have  been  furnished, 
the  whole  amoimt  of  such  moneys  will  be  held  to  meet 
the  payment  of  his  checks  properly  payable  therefrom. 

In  case  of  the  death,  resignation,  or  removal  of  any 
disbursing  officer,  checks  previously  drawn  by  him  will 
be  paid  from  the  funds  to  his  credit,  imless  such  checks 
have  been  drawn  more  than  four  months  before  their 
presentation,  or  reasons  exist  for  suspecting  fraud.  Any 
check  previously  drawn  by  him  and  not  presented  for 
payment  within  four  months  of  its  date  will  not  be  paid 


362 


Independent   Treasury  of  the   United  States 

until   its   correctness   shall   have   been   attested   by   the 
Comptroller  of  the  Treasury  or  his  chief  clerk. 

Every  disbursing  officer,  when  opening  his  first  account, 
before  issuing  any  checks  will  furnish  the  depositary 
on  whom  checks  are  drawn  with  his  official  signature, 
duly  verified  by  some  officer  whose  signature  is  known 
to  the  depositary. 


363 


5- 

The  Assembling  of  Disbursing  Officers'  Checks 
AND  Vouchers  and  the  Verification  of  their 
Balances  in  the  Offices  of  the  Auditors  of  the 
Treasury  Department. 

July  29,  1907. 

1907,  Department  Circular  No.  52. 

To  disbursing  officers: 

1.  The  practice  of  requiring  public  creditors  to  receipt 
for  moneys  in  advance  of  actual  payment  will  be  discon- 
tinued after  September  30,  1907.  No  payments  after 
said  date  shall  be  evidenced  by  a  receipt,  except  where 
receipts  are  required  either  by  law  or  contract,  unless 
such  payments  are  made  in  cash,  that  is,  currency. 

2.  After  September  30,  1907,  no  receipt  for  moneys  paid 
by  disbursing  officers'  checks  shall  be  required  or  taken 
by  disbursing  officers  except  where  receipts  are  required 
either  by  law  or  contract.  Disbursing  officers  will  note 
on  vouchers  for  check  payments  the  date,  number,  name 
of  payee,  and  amount  of  the  check  and  the  name  of  the 
depositary  on  whom  drawn. 

3.  All  vouchers  for  payment  by  disbursing  officers, 
except  those  required  by  law  to  be  verified  by  affidavit, 
and  the  expense  accounts  of  the  civilian  officers,  employees, 
and  agents  of  the  Government,  which  shall  be  verified  by 
affidavit  as  heretofore,  shall  be  certified  by  the  claimant 
as  correct  and  just,  except  that  vouchers  for  personal 
compensation  for  services  rendered  under  the  personal 
supervision  of  some  administrative  officer  and  so  certified 
by  liim,  need  not  be  certified  by  the  claimant,  provided 

364 


Independent   Treasury  of  the   United   States 

the  voucher  describes  specifically  the  position,  the  rate  of 
compensation,  and  the  period  covered. 

4.  Disbursing  officers  shall  identify  their  official  checks 
with  the  vouchers  upon  which  they  are  issued  in  payment 
by  noting  on  each  check  the  number  or  other  necessary 
description  of  the  voucher.     (See  also  paragraph  9.) 

5.  Disbursing  officers  shall  make  cash  payments  only 
in  cases  authorized  by  Treasury  Department  Circular  No. 
102,  dated  December  7,  1906,  and  then  in  only  those  cases 
where  the  payment  is  made  by  the  disbursing  officer  in 
person,  or  by  his  deputy,  and  the  exchange  of  money  and 
the  receipt  therefor  is  simultaneous. 

6.  When  payments  are  made  in  cash,  that  is,  currency, 
they  must  be  evidenced  by  a  statement  of  such  fact  in 
the  receipt  and  in  substantially  the  following  form  (except 
upon  pay  rolls  which  shall  embody  instructions  calculated 
to  insure  the  receipt  thereof  only  under  the  conditions 
laid  down  in  the  form  given  in  this  paragraph) : 

"  Received  from   in  person,  or  by  his  deputy, 

and  in  cash,  the  sum  of  ....  dollars  and cents,  in 

full  payment  of  voucher  No ,  account " 

7.  Unless  required  by  law,  vouchers  shall  not  be  taken 
in  exact  duplicate,  triplicate,  etc.  Only  one  copy  of  a 
voucher,  the  original,  shall  contain  signed  certifications, 
approvals,  and  receipts.  As  many  copies,  in  memo- 
randum form,  duly  authenticated  if  desired,  may  be  taken 
as  administrative  requirements  demand. 

Each  officer  or  agent  required  by  law  to  render  accounts 
for  public  moneys  and  having  such  public  moneys  on 
deposit  to  his  official  credit  shall,  as  soon  after  September 
30,   1907,  as  practicable,  forward  to  the  Auditor  of  the 

365 


National     M on  et ar y     Commission 

Treasury  Department  by  whom  his  accounts  are  settled 
a  certified  statement  of  his  checks,  giving  number,  date, 
and  amount  of  each,  for  each  open  depositary  accoimt 
outstanding  and  unpaid  at  the  close  of  business  September 
30,  1907.     Such  statements  will  not  thereafter  be  required. 

9.  On  and  after  October  i,  1907,  all  disbursing  officers 
who,  for  any  reason  (e.  g.,  separate  bonds,  etc.),  are  re- 
quired to  render  separate  and  distinct  accounts  to  the 
Auditors  of  the  Treasury  Department,  shall  keep  separate 
and  distinct  accounts  of  their  funds  in  the  Government 
depositaries,  and  shall  unmistakably  designate  such  sev- 
eral depositary  accounts  on  their  vouchers,  requisitions, 
deposits,  and  accounts  current. 

10.  Disbursing  officers  keeping  and  rendering  to  the 
Auditors  of  the  Treasury  Department  separate  and  dis- 
tinct accoiuits  shall,  as  soon  as  practicable  after  the  re- 
ceipt of  depositary  statements  for  the  month  of  Septem- 
ber, 1907,  designate  to  such  depositaries  the  amounts  of 
their  balances,  which  shall  be  severally  credited  to  the 
separate  and  distinct  accounts  herein  provided  for,  and 
accompany  such  designation  with  a  copy  of  each  list  of 
outstanding  and  unpaid  checks  required  to  be  forwarded 
to  the  several  Auditors  of  the  Treasury  Department  by 
paragraph  8  of  this  circular. 

11.  When  partial  payments  are  made  on  account  of 
salaries  or  wages  and  claim  for  credit  for  the  same  is  de- 
ferred until  completed  payment  for  the  period  has  been 
made,  the  amounts  of  such  partial  payments  constitute  a 
part  of  the  acknowledged  balance,  and  the  total  of  such 
amounts,  together  with  the  facts,  shall  be  set  out  in  the 
analysis  of  balance  provided  by  the  standard  form  pre- 

366 


Independent   Treasury  of  the   United  States 

scribed  by  the  Treasury   Department  Circular  No.   46, 
dated  May  24,  1906. 

12.  The  balances  acknowledged  by  disbursing  officers 
and  their  analyses  thereof  must  actually  represent  the 
state  of  their  business  at  the  close  of  the  last  day  for  which 
the  accounts  are  rendered.  They  must  so  order  their  busi- 
ness that  they  may,  when  called  upon  so  to  do,  close  their 
accounts  and  analyze  their  acknowledged  balances. 

13.  All  transactions  coming  within  the  time  covered 
by  an  account  shall  be  reported  therein.  No  payments 
or  collections  not  actually  made  during  the  period  of  an 
account  shall  be  included  therein.  The  provisions  of  this 
paragraph  do  not  apply  to  partial  payments  of  salaries  or 
wages  which  are  provided  for  by  paragraph  1 1  hereof. 

14.  If  disbursing  officers  do  not  for  any  reason  receive 
from  their  depositaries  the  monthly  statements  required 
to  be  rendered  to  them  by  paragraph  16  of  this  circular 
in  time  for  them  to  analyze  their  balances  in  the  manner 
contemplated  by  the  standard  form  of  account  current 
prescribed  by  Treasury  Department  Circular  No.  46 
dated  May  24,  1906,  they  shall  not  delay  the  rendition  of 
their  accounts  so  as  to  make  them  delinquent,  but  shall 
compute  their  net  balances  from  their  check  stubs  and 
state  that  such  balances  are  so  computed,  together  with 
a  report  of  the  cause  of  their  failure  to  compute  such  bal- 
ances in  the  prescribed  manner. 

1 5 .  Each  officer  disbursing  in  part  by  cash  and  drawing 
his  official  checks  to  obtain  cash  to  make  payments  shall 
render  with  his  account  current  a  subsidiary  cash  account, 
the  balance  of  which  should  agree  to  be  reconciled  with  his 
cash  as  shown  by  his  analysis  of  balance  with  his  account 
current. 

367 


National     Monetary     C  ommis  s  io 


n 


To  the   Treasurer  and   assistant    treasurers  of  the  United 
States  and  designated  depositaries: 

1 6.  The  Treasurer  of  the  United  States,  each  assistant 
treasurer  of  the  United  States,  and  each  designated  de- 
positary (herein  elsewhere  collectively  termed  "deposi- 
taries ")  shall  render  monthly  statements  to  officers  hav- 
ing public  funds  on  deposit  to  their  official  credit. 

17.  Depositaries  shall  also  render  statements  to  officers 
having  public  funds  on  deposit  to  their  official  credit  upon 
request  of  said  officers  to  enable  them  to  close  their 
accounts,  and  to  inspecting  and  administrative  officers 
upon  their  request  when  engaged  in  the  duly  authorized 
inspection  of  accounts. 

18.  Depositaries  shall  keep  separate  accounts  with  and 
render  separate  statements  to  officers,  as  required  by  para- 
graphs 1 6  and  1 7  hereof,  corresponding  to  the  accounts  ren- 
dered by  such  officers  to  the  several  auditors  of  the  Treas- 
ury Department.  (See  pars.  9  and  10.)  Checks  drawn 
prior  to  October  i,  1907,  shall  be  charged  to  the  account 
indicated  by  the  list  of  outstanding  checks  required  to  be 
furnished  depositaries  by  paragraph  10  of  the  circular. 
Checks  so  drawn,  that  is,  prior  to  October  i,  1907,  and 
paid  after  September  30,  1907,  shall  be  included  in  cur- 
rent depositary  statements,  but  the  paid  checks  will  be 
retained  by  depositaries  as  provided  by  Treasury  De- 
partment Circular  No.  102,  dated  December  7,  1906. 

19.  The  statements  provided  for  by  paragraphs  16  and 
17  hereof  shall  show  a  full  and  true  account,  including  the 
date,  number,  and  amount  of  each  check  paid,  and  the 


368 


Independent   Treasury  of  the   United  States 

date  and  amount  of  each  item  placed  to  the  officers'  offi- 
cial credit  during  the  period  of  such  statement. 

20.  The  said  statements  shall  always  be  rendered  to 
officers  in  time  for  them  to  use  the  information  contained 
therein  in  analyzing  their  balances  in  the  manner  pro- 
vided by  the  standard  account  current  form  prescribed 
by  Treasury  Department  Circular  No.  46,  dated  May  24, 
1906.  Depositaries  will  so  order  their  business  that  they 
will  be  enabled  to  comply  with  the  provisions  of  this  para- 
graph. 

21.  Depositaries  will  forward  to  the  Secretary  of  the 
Treasury  (Division  of  Public  Moneys)  a  copy  of  each  state- 
ment rendered  to  officers  having  public  funds  on  deposit 
to  their  official  credit. 

22.  Beginning  with  the  month  of  October,  1907,  the 
copies  of  statements  herein  required  to  be  forwarded  to 
the  Secretary  of  the  Treasury  (Division  of  Public  Moneys) 
shall  he  accompanied  by  the  paid  checks  scheduled  therein, 
except  checks  drawn  prior  to  October  i,  1907,  which  will 
be  retained  by  the  depositary  as  provided  in  paragraph  1 8 
hereof. 

23.  The  copies  of  statements  and  paid  checks  shall  be 
forwarded,  as  herein  provided,  to  the  Secretary  of  the 
Treasury  (Division  of  Public  Moneys),  together  with  a 
list  of  balances  standing  to  the  official  credit  of  disbursing 
and  other  officers  of  the  United  States. 

24.  To  prevent  fraud  or  the  misuse  of  paid  checks  the 
depositaries  will  immediately,  upon  the  payment  of  a 
check,  mark,  stamp,  or  otherwise  plainly  indicate  thereon 
the  fact  of  its  payment. 

41969°— 10 24  369 


National     Monetary     Commission 

To  the  Division  of  Public  Moneys: 

25.  The  Division  of  Public  Moneys  shall,  upon  receipt 
of  the  list  of  balances  standing  to  the  official  credit  of  dis- 
bursing and  other  officers  of  the  United  States,  accom- 
panied by  the  individual  monthly  depositary  statements 
and  paid  checks  required  to  be  forwarded  by  paragraphs 
21,  22,  and  23,  check  the  individual  balances  shown  by 
the  individual  monthly  statements  against  the  list  of  bal- 
ances, and  promptly  transmit  the  individual  monthly 
statements  and  the  paid  checks  to  the  Auditor  of  the 
Treasury  Department  charged  with  the  settlement  of  the 
account  to  which  they  pertain. 


9 


370 


UNIVERSITY  OF  CALIFORNIA  AT  LOS  ANGELES 

THE  UNIVERSITY  LIBRARY 
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